McMillan Shakespeare Limited - Australia’s leading provider of workplace benefits. All of the benefits, none of the hassles. Annual Report 2012 McMillan Shakespeare Limited A.B.N. 74 107 233 983 A.F.S.L. No. 299054 Level 21, 360 Elizabeth Street Melbourne, Victoria 3000 www.mcms.com.au MCMS_MAKG_Rebrand_AnnReport2012.indd 1-2 16/08/12 3:32 PM CONTENTS DIRECTORS’ REPORT CORPORATE GOVERNANCE STATEMENT STATEMENTS OF COMPREHENSIVE INCOME STATEMENTS OF FINANCIAL POSITION STATEMENTS OF CHANGES IN EQUITY STATEMENTS OF CASH FLOWS NOTES TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDIT REPORT AUDITOR’S INDEPENDENCE DECLARATION SHAREHOLDER INFORMATION 1 16 21 22 23 24 25 59 60 63 64 CORPORATE DIRECTORY Inside front cover ANNUAL GENERAL MEETING The Annual General Meeting of the members of McMillan Shakespeare Limited A.B.N. 74 107 233 983 will be held on 22 October 2012 at 10:00 am at the State Library of Victoria, Ground Floor, 328 Swanston St, Melbourne, Victoria in the Experimedia room. CORPORATE DIRECTORY Directors Ronald Pitcher, AM (Chairman) Michael Kay (Managing Director) John Bennetts Ross Chessari Graeme McMahon Anthony Podesta Company Secretary Mark Blackburn Registered Office Level 21, 360 Elizabeth Street Melbourne Victoria 3000 Tel: +61 3 9097 3000 Fax: +61 3 9097 3060 Auditor Grant Thornton Audit Pty Ltd Level 2, 215 Spring Street Melbourne Victoria 3000 Share Registry Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 Tel: +61 3 9415 4000 Website www.mmsg.com.au DIRECTORS’ REPORT The directors of McMillan Shakespeare Limited (Company or MMS) present this report on the consolidated entity, consisting of the Company and the entities that it controlled at the end of, and during, the fi nancial year ended 30 June 2012 (Group or Consolidated Group). DIRECTORS As at the date of this Annual Report, the Directors of the Company are Mr Ronald Pitcher AM (independent Chairman), Mr Michael Kay (Managing Director and Chief Executive Offi cer), Mr John Bennetts (Non-Executive Director), Mr Ross Chessari (Non-Executive Director), Mr Graeme McMahon (independent Non-Executive Director) and Mr Anthony Podesta (Non-Executive Director) (Directors). Each Director held offi ce as a Director throughout the fi nancial year ended 30 June 2012. Details of the qualifi cations, experience and special responsibilities of the Directors at the date of this Annual Report are set out on pages 4 and 5. The Directors that are noted above as independent Directors, as determined in accordance with the Company’s defi nition of independence, have been independent at all times throughout the fi nancial year ended 30 June 2012. DIRECTORS’ MEETINGS The number of meetings held by the board of Directors (Board) (including meetings of committees of the Board) and the number of meetings attended by each of the Directors during the fi nancial year ended 30 June 2012 were as follows: Director Eligible to Attend Attended Eligible to Attend Attended Eligible to Attend Attended Board Meetings Audit Committee Meetings Remuneration Committee Meetings Mr R. Pitcher, AM (Chairman) Mr M. Kay (Managing Director and CEO) 1 Mr J. Bennetts Mr R. Chessari Mr G. McMahon Mr A. Podesta1 11 11 11 11 11 11 11 11 11 11 11 10 5 - 5 5 5 - 5 - 5 5 5 - 5 - 5 5 5 - 5 - 5 5 5 - 1 Mr Kay and Mr Podesta attend Audit Committee and Remuneration Committee meetings by invitation. PRINCIPAL ACTIVITIES The principal activities of the Company and its controlled entities during the course of the fi nancial year ended 30 June 2012 was the provision of remuneration, asset management and fi nance services to public and private organisations predominantly in Australia. In the opinion of the Directors, there were no signifi cant changes in the nature of the activities of the Company and its controlled entities during the course of the fi nancial year ended 30 June 2012 that are not otherwise disclosed in this Annual Report. RESULTS Details of the results for the fi nancial year ended 30 June 2012 are as follows: Results Net profi t after income tax (NPAT) Basic earnings per share Earnings per share on a diluted basis 2012 2011 $54,305,163 $43,460,470 76.6 cents 74.1 cents 64.0 cents 61.2 cents McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 1 Financial Highlights NPAT performance Revenue performance NPAT 7-year CAGR of 40%(1) 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 s n o i l l i m $ FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Historical NPAT Acquisition Gain Revenue Group Remuneration Services Revenue Asset Management Total dividends per share Normalised earnings per share (EPS) (2) 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 s t n e c EPS 7-year CAGR of 38.2% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 Basic EPS Cash EPS McMillan Shakespeare Limited Share price - March 04 to June 12 60 50 45 40 35 30 25 20 15 10 5 0 s n o i l l i m $ 45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 s t n e c $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 4 0 - r a M 4 0 - n u J 4 0 - p e S 4 0 - c e D 5 0 - r a M 5 0 - n u J 5 0 - p e S 5 0 - c e D 6 0 - r a M 6 0 - n u J 6 0 - p e S 6 0 - c e D 7 0 - r a M 7 0 - n u J 7 0 - p e S 7 0 - c e D 8 0 - r a M 8 0 - n u J 8 0 - p e S 8 0 - c e D 9 0 - r a M 9 0 - n u J 9 0 - p e S 9 0 - c e D 0 1 - r a M 0 1 - n u J 0 1 - p e S 0 1 - c e D 1 1 - r a M 1 1 - n u J 1 1 p e S 1 1 c e D 2 1 r a M 2 1 n u J 1 2 NPAT 7-year CAGR is normalised to exclude the profi t recognised on acquisition of Interleasing (Australia) Limited in FY10 ($17M profi t after tax). Normalised EPS excludes the profi t recognised on acquisition of Interleasing (Australia) Limited. Cash EPS includes CAPEX but excludes the investment in Fleet growth. 2 DIVIDENDS Details of dividends declared and/or paid by the Company during the fi nancial year ended 30 June 2012 are as follows: Dividends 2012 $ 2011 $ Final dividend for the fi nancial year ended 30 June 2011 of 22.0 cents (2010: 14.0 cents) per ordinary share paid on 14 October 2011 fully franked at the tax rate of 30% (2010: 30%). 15,027,150 9,497,436 Interim dividend for the fi nancial year ended 30 June 2012 of 22.0 cents (2011: 16.0 cents) per ordinary share paid on 30 March 2012 fully franked at the tax rate of 30% (2011: 30%). Total 16,395,272 10,890,810 31,422,422 20,388,246 Subsequent to the fi nancial year ended 30 June 2012, the Directors declared a fi nal dividend of 25 cents per ordinary share (fully franked at the tax rate of 30%) to be paid on 12 October 2012 out of retained profi ts as at 30 June 2012, bringing the total dividend to be paid for the fi nancial year ended 30 June 2012 to 47 cents per ordinary share, an increase of 24%. REVIEW OF OPERATIONS In last year’s Annual Report, we suggested that the levels of service delivered to our customers and the investments being made in our people and our business would set a platform for profi table growth in 2012. And so it has proved to be. Despite the economic uncertainties globally, and in Australia, shareholders can be well pleased with what was achieved in the 2012 fi nancial year. Here is a selection of key highlights and activities: • • • • • • • Financial results were particularly pleasing. MMS delivered a 25% increase in net profi t after tax (NPAT) on a 11% increase in revenue. Both business segments performed well. Group Remuneration Services continued to demonstrate its non-cyclical nature with NPAT growth of 27% on 23% revenue growth. The Asset Management business (acquired by MMS in 2010) also had an excellent year, with underlying normalised NPAT growth of 21% i.e. normalising for FY2011 tyre and maintenance release when we changed from the vendor’s accounting principles (USGAAP) to IFRS. A strong second hand car market, and consequent profi ts on the resale of fl eet cars, assisted these results. Assets under fi nance increased from $220m to $262m, refl ecting the increasing momentum in the asset management business. 79% of new business and cross sales wins were in the private sector. We believe this vindicates the decision to combine our traditional remuneration services business with an asset manager, through the acquisition of Interleasing in 2010. In February 2012, MMS subsidiary, Maxxia, was appointed sole provider to the SA Government for its salary packaging needs. Previously we were one of a panel of three. We believe this is a refl ection of our relentless focus on the execution of our strategy, namely, to deliver excellence in customer service and expense management. This enables us to deliver to customers the best product in the industry, at a compelling price. Throughout 2012, we rolled out our customer relationship strategy. This is designed to take us beyond a merely transactional relationship with our customers to one of genuine partnership. Better understanding our customers enables us to better craft our services to meet their needs, thus driving greater satisfaction for customers and more revenue for us. To augment our desire to get closer to our customers, we have created a new State based structure, where state managers own their customers and their profi t and loss account. Such a structure enables us to decentralise service delivery whilst centralising processing for effi ciency. It also provides important development opportunities, and satisfying career paths, for talented managers. As always, the delivery of excellent service underpinned our performance. All benchmarks were exceeded. Pleasingly, our expense ratio/productivity also improved. • We are well advanced with the development and roll-out of the new asset management system. This is expected to be delivered in CY2013. Additionally, our new business intelligence capability will be rolled out during FY2013. These are both important investments in the future of our business. • Credit and treasury have been well-managed. In February, our funding lines were extended to 2015 and on better terms. Additionally, in August 2012 the Group increased its facility from $180m to $270m. Careful treasury planning also provided some respite from the impact of declining interest rates on the earnings on our fl oat. Credit losses were less than $40,000 on a book of $262m. • Headcount increased by 124 to over 750. Signifi cant investment continues to be made in the training of our people, the identifi cation of talent and the development of our leaders. FY2012 was a productive and successful year for our business. Much was achieved, not the least of which was the ongoing investment into the sustainability of our business and the improvement of our business model. Our business has good momentum and, despite the ongoing economic turmoil around the world, we are well placed to deliver another year of profi table growth for shareholders. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 3 STRATEGY AND PROSPECTS McMillan Shakespeare Group strategy remains unchanged moving into the 2013 fi nancial year. We will continue to increase participation rates in current employer contracts and win new employer contracts through our unique offering of salary packaging and fl eet management services. We will deliver our products and services through a house of brands: Maxxia; RemServ; Interleasing and Holden Leasing. Underpinning our ongoing profi table growth is industry leading customer service, low delivered cost and sophisticated risk management. We believe this combination of capabilities is of high value to customers and is the reason so many employers choose McMillan Shakespeare Group companies as their service providers. In the year ahead, we will keep our eye fi rmly focussed on business as usual. We will also look for well priced acquisitions that fi t with, and enhance, our business model. We will continue to invest in our business ahead of the growth curve. Ours is a complex business, with over half a million individual salary packaging payments per month in the Group Remuneration Services segment, all of which need to comply with the tax laws. Developing our people, systems and processes is critical to keeping up with the signifi cant compounding growth numbers the business has achieved since listing in 2004. FY2013 will be another year of signifi cant investment, particularly in IT where we are upgrading our fl eet management and business intelligence systems. In summary, our business is clear about its strategy and how it intends to compete. We are well prepared for the challenges of the 2013 fi nancial year and will continue to prepare ourselves for success in the years ahead. STATE OF AFFAIRS There were no signifi cant changes in the state of affairs of the Company and its controlled entities that occurred during the fi nancial year ended 30 June 2012 that are not otherwise disclosed in this Annual Report. EVENTS SUBSEQUENT TO BALANCE DATE As at the date of this Annual Report, the Directors are not aware of any matter or circumstance that has arisen that has signifi cantly affected or may signifi cantly affect the operations of the Company and its controlled entities, the results of those operations or the state of affairs of the Company and its controlled entities in the fi nancial years subsequent to 30 June 2012 that are not otherwise disclosed in this Annual Report. LIKELY DEVELOPMENTS Other than the information disclosed in this Annual Report, information as to the likely developments in the operations of the Company and its controlled entities and the expected results of those operations in subsequent years has not been included in this Annual Report because the Directors believe, on reasonable grounds, that to include such information would be likely to result in unreasonable prejudice to the Company and its controlled entities. DIRECTORS’ EXPERIENCE & SPECIAL RESPONSIBILITIES Name: Ronald Pitcher AM, FCA, FCPA Appointed: 4 February 2004 Positions: Chairman of the Board Chairman of the Audit Committee (resigned 25 June 2012) Member of the Audit Committee Chairman of the Remuneration Committee Age: 73 Mr Pitcher is a Chartered Accountant with over 45 years experience in the accounting profession and the provision of business advisory services. Mr Pitcher was until recently a director of National Can Industries Limited (since 1994) and is a director of Reece Australia Limited (since 2003). Under the Company’s defi nition of independence, Mr Pitcher is considered to be independent. Name: Michael Kay LLB Appointed: 15 July 2008 Positions: Managing Director and Chief Executive Offi cer Age: 54 Before joining the Company in May 2008, Mr Kay was the Chief Executive Offi cer of Australian Associated Motor Insurers Limited (AAMI). Mr Kay joined AAMI in 1993, and before rising to the position of Chief Executive Offi cer in 2006, he served as General Manager, Southern Region (comprising Victoria, Tasmania and South Australia) and Executive Chairman, Corporate Affairs and then, from 2002, as the Chief Operating Offi cer. Before joining AAMI, Mr Kay practised for 10 years as a solicitor. Mr Kay is a director of RAC Insurance and a former member of the Commonwealth Consumer Affairs Advisory Council, the Administrative Law Committee of the Law Council of Australia, the Victorian Government Finance Industry Council and the Committee for Melbourne. Mr Kay holds a Bachelor of Laws from the University of Sydney. 4 Name: Anthony Podesta B Ed (Bus), MTMA, FTIA, MAICD Appointed: 1 December 2003 Positions: Non-Executive Director Age: 56 Mr Podesta founded the McMillan Shakespeare business in 1988 and has been instrumental in the growth of its operations and the development of the outsourced salary packaging administration industry in Australia since that time. Mr Podesta is a fellow of the Taxation Institute of Australia, a member of the Australian Institute of Company Directors. Mr Podesta stepped down from his executive responsibilities effective 17 August 2010. Mr Podesta is the company’s largest shareholder and is on the Board as a Non-Executive Director. Name: John Bennetts B Ec, LLB Appointed: 1 December 2003 Positions: Non-Executive Director Member of the Audit Committee Member of the Remuneration Committee Age: 49 Mr Bennetts is an experienced investor and a founder and director of a number of companies, including until recently, Cellestis Limited and private equity investment fi rm, Mooroolbark Investments Pty Limited (M-Group). He has also provided advisory services to a range of companies in Australia and Asia. Prior to the establishment of the M-Group, he was Group Legal Counsel and Company Secretary of Datacraft Limited. Before joining Datacraft Limited, he practised as a solicitor. Name: Ross Chessari LLB, M Tax Appointed: 1 December 2003 Positions: Non-Executive Director Member of the Audit Committee (resigned 25 June 2012) Member of the Remuneration Committee Age: 51 Mr Chessari is a founder and director of the investment manager, SciVentures Investments Pty Limited (SciVentures). Prior to founding SciVentures, Mr Chessari was the Managing Director of ANZ Asset Management and the General Manager of ANZ Trustees. Name: Graeme McMahon FCPA, FRAS, FCIT Appointed: 18 March 2004 Positions: Non Executive Director Chairman of the Audit Committee (from 25 June 2012) Member of the Audit Committee Member of the Remuneration Committee Age: 72 A member of the Council at La Trobe University, Mr McMahon was formerly a director of SSSR Holdings Pty Limited and Expo Hire (Aust.) Pty Limited, and a member of the Queensland Australian Football League Commission. Mr McMahon held the position as Chairman of the Essendon Football Club for seven years and was the Managing Director and Chief Executive Offi cer of Ansett Australia Group until 1996. He is a Fellow of the CPA of Australia, a Fellow of the Royal Aeronautical Society and a Fellow of the Chartered Institute of Logistics and Transport. Under the Company’s defi nition of independence, Mr McMahon is considered to be independent. COMPANY SECRETARY Mark Blackburn: Chief Financial Offi cer and Company Secretary Mark Blackburn, Dip Bus (Acct), CPA, GAICD joined McMillan Shakespeare Group as Chief Financial Offi cer in October 2011. Mr Blackburn commenced as Company Secretary on 26 October 2011. Mr Blackburn has over 30 years experience in fi nance, working across a broad range of industries for companies such as WMC, Ausdoc, Laminex Industries, AAMI/Promina and Olex Cables. In particular, he has public company experience in fi nancial management and advice, management of fi nancial risks, management of key strategic projects, acquisitions and establishing joint ventures. Prior to his employment with McMillan Shakespeare Group, Mr Blackburn was Chief Financial Offi cer of AUSDOC Group Ltd, IOOF Holdings Ltd and iSelect Pty Ltd. Paul McCluskey: Chief Financial Offi cer and Company Secretary (resigned 26 October 2011) McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 5 REMUNERATION REPORT Overview The Group’s remuneration policies and practices are designed to align the interests of staff and shareholders while attracting and retaining staff members who are critical to its growth and success. The Board maintains a Remuneration Committee whose objectives are to oversee the formulation and implementation of remuneration policy and make recommendations to the Board on remuneration policies and packages applicable to the Directors and executives. For further details of the composition and responsibilities of the Remuneration Committee, please refer to the Corporate Governance Statement. Remuneration Structure – Non-Executive Directors The Non-Executive Directors are remunerated for their services from the maximum aggregate amount approved by the shareholders of the Company on 19 October 2010 for that purpose ($600,000 per annum). The Board sets the fees for the Chairman and the other Non-Executive Directors. No additional fees are paid for participation in Board committees. The Board’s policy is to remunerate the Chairman and the Non-Executive Directors at market rates for comparable companies for the time and commitment involved in meeting their obligations. Neither the Chairman nor the other Non-Executive Directors received or were entitled to any performance related remuneration or options with respect to the fi nancial years ended 30 June 2012 and 30 June 2011. There is no direct link between the remuneration of the Chairman or any other Non-Executive Director and the short term results of the Group because the primary focus of the Board is on the long term strategic direction and performance of the Group. There are no termination payments payable to the Chairman or the other Non-Executive Directors on their retirement from offi ce other than payments relating to the accrued superannuation entitlements included in their remuneration. Remuneration Structure – Executive Directors and Senior Executives Overview In setting its remuneration arrangements, reference has been made to the current employment market in which the Group operates. The components of remuneration for each executive comprise fi xed remuneration (including superannuation and benefi ts) and long-term equity-linked performance incentives (in the form of options). The Remuneration Committee reviews the fi xed remuneration component of each executive’s remuneration each year (or on promotion). For the fi nancial year commencing July 2012 the Remuneration Committee has reviewed remuneration based on an analysis of the Top 500 Report (Director and Senior Executive Remuneration) 2012, and Hewitt The Australian Top Executive Remuneration Reports for organisations with Annual Revenue $251-$500 Million and 301-1,000 employees. Fixed Remuneration The fi xed remuneration component comprises salary, superannuation and, in some cases, non-cash benefi ts, such as motor vehicle lease payments and car parking benefi ts. Fixed remuneration refl ects the duties, responsibilities and performance levels of the relevant executive, general market conditions and comparable remuneration offered in related industry sectors. No element of the fi xed remuneration component is at risk. Neither the Chief Executive Offi cer nor the Chief Financial Offi cer are remunerated separately for acting as an offi cer of the Company or any of its controlled entities. Short-term Incentives The Company does not generally offer contracted cash bonuses as part of a short term incentive program. However, following the acquisition of Interleasing (Australia) Limited in 2010, the Company established a short-term incentive program for three executives. The Remuneration Committee recommended to the Board short term targets to reward business stabilisation, realisation of discount on acquisition, improvement in operating profi t and establishment of growth momentum following the acquisition. These short term incentives were paid to the relevant executives in FY2012. This program has now been discontinued now that the integration is complete. No other contracted cash based short-term incentives were paid to (or were forfeited by) any executives during the fi nancial year ended June 2012. The Remuneration Committee also has the authority to issue discretionary (as to both award and amount) cash bonuses as a reward for out-performance compared to budgeted targets. Any bonus payable can, at the discretion of the executive, be sacrifi ced as superannuation. Such bonuses were paid to the majority of individual executives in relation to the year ended 30 June 2012. 6 Long-term Incentives From time to time the Company issues options to certain executives and employees under the McMillan Shakespeare Limited Employee Option Plan. Two types of options have been granted under this plan, performance options and voluntary options. The Board believes that the use of options is the most appropriate form of long-term equity-based performance incentive to reinforce alignment with shareholder interests. All options issued have an exercise price (or strike price) and only become valuable to the extent that the share price rises above the exercise price. Given that options are issued at or above the prevailing market price at the date that the Board approved the grant (other than as disclosed in this Annual Report), it is implied that increased shareholder wealth is required. The use of earnings per share growth targets for the performance option entitlements has historically been adopted to align the long term interests of the executives with shareholders and ensure appropriate behaviours are adopted for the long term benefi t of all stakeholders. However, the Board has determined that use of NPAT targets for the options issued in the fi nancial year ended 30 June 2012 is a more appropriate measure than EPS targets. This was due to the high number of options (6,459,030) due to vest in the year ended 30 June 2012 which had the potential to materially reduce the EPS metric, depending on when the options were elected to be exercised. The majority of these vesting options related to options issued in the fi nancial year ended 30 June 2009 and were based on fi nancial targets that required 20% EPS growth (base year FY2008) for FY2009, FY2010 and FY2011 plus a transformational event target to achieve 100% vesting. The market capitalisation of the Company at the time of these options were issued ranged between $129 million to $220 million and the exercise price was set at a premium to the Company’s share price at the time of the issue ranging from 45% and 146%. At the time of vesting the market capitalisation of MMS was in excess of $600m. These vesting options represented over 9% of the shares on issue. Recognising that NPAT targets are not an appropriate measure of performance when there is a change in the capital structure of the Company, the NPAT targets may be adjusted to take account of such changes e.g. an increase in NPAT targets would be made for increased earnings derived from option proceeds or an acquisition where additional shares were issued No executive can enter into a transaction that is designed or intended to hedge the executive’s exposure to any unvested option. Executives will be required to provide declarations to the Board on their compliance with this policy from time to time. Performance Options Performance options over unissued ordinary shares in the Company are granted for no consideration and are, other than as disclosed in this Annual Report, granted at or above market prices prevailing when the Board approved the issue. Performance options carry no dividend or voting rights. Once exercised, each option is converted into one fully paid ordinary share in the Company. The Remuneration Committee recommends to the Board the number of performance options to be granted on the basis of the position, duties and responsibilities of the relevant executive. As at 30 June 2012, the Company had made thirteen offers of performance options in March 2004, December 2004, April 2005, August 2005, February 2007, December 2007, July 2008, November 2008, August 2009 and May 2010, August 2011, October 2011 and March 2012. Many of the performance options issued have vested or expired prior to the fi nancial year ended 30 June 2012. Voluntary Options To provide executives with an additional opportunity to invest in MMS the Board provided executives with the opportunity to acquire options at a 25% discount to their fair value up to an investment limit of $50,000 per executive. The maximum discount to any one executive is therefore limited to $16,666. During the year, 314,578 options were issued at $1.32 each and expire on 30 September 2015 (the consideration was set at a 25% discount to the fair value of the options on grant date). The entitlement to exercise the voluntary options is not contingent upon continued employment with the Company nor are there performance hurdles. However, if the executive leaves employment before 31 August 2014, the executive will forfeit 25% of their entitlement for $1 (the amount forfeited being equal to the 25% discount to the fair market value that applied to the acquisition price of the option at the date of the conditional offer and acceptance). The vesting date of these options is upon adoption of the Company’s Annual Report for the year ended 30 June 2014. No performance hurdles are attached to these options as the executive has paid $50,000 for the purchase of the options (representing 75% of the fair value of the options on grant date). The Board is of the view that the purchase of options for valuable consideration aligns the interests of Executives with the long term interests of shareholders, especially in light of the forfeit conditions. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 7 Details for current performance and voluntary options & performance options vested in FY2012 Options & issue date Expiry Conditions 3,750,000 (July 2008) 30 June 2012 (a) Continuity of employment to 30 June 2011 (b) Achievement of predetermined targets, of which 75% was based on earnings per share (“EPS”) targets over three years, including a cumulative EPS target over the three year period in the event that the maximum EPS target was not achieved in any one year. (c) The EPS growth targets were based on the actual FY2008 EPS achieved as the base year as follows: Vested The options vested upon the adoption of the 2011 Annual Report. Performance Hurdles Achievement of FY2009 EPS growth of not less than 15.0% Achievement of FY2009 EPS growth of not less than 17.5% Achievement of FY2009 EPS growth of not less than 20.0% Achievement of FY2010 EPS growth of not less than 15.0% Achievement of FY2010 EPS growth of not less than 17.5% Achievement of FY2010 EPS growth of not less than 20.0% Achievement of FY2011 EPS growth of not less than 15.0% Achievement of FY2011 EPS growth of not less than 17.5% Achievement of FY2011 EPS growth of not less than 20.0% Weighting 12.50% 6.25% 6.25% 12.50% 6.25% 6.25% 12.50% 6.25% 6.25% (d) The balance (25%) was based on the undertaking by the Company of a transformational event resulting in a major diversifi cation for the Company. The transformational event is regarded as having been met through the acquisition of Interleasing (Australia) Ltd. 2,600,114 (November 2008) and 327,273 (August 2009) November 2012 and August 2013 (a) Continuity of employment. (b) Achievement of predetermined targets, of which 100% was based on EPS targets over three years, including a cumulative EPS target over three years in the event that the maximum target was not achieved in any one year. (c) The EPS growth target was based on the actual FY2008 EPS achieved as the base year as follows: Other than options in this tranche which have lapsed due to resignation, the options in this tranche vested during the year upon the adoption of the 2011 Annual Report. Performance Hurdles Achievement of FY2009 EPS growth of not less than 15.0% Achievement of FY2009 EPS growth of not less than 17.5% Achievement of FY2009 EPS growth of not less than 20.0% Achievement of FY2010 EPS growth of not less than 15.0% Achievement of FY2010 EPS growth of not less than 17.5% Achievement of FY2010 EPS growth of not less than 20.0% Achievement of FY2011 EPS growth of not less than 15.0% Achievement of FY2011 EPS growth of not less than 17.5% Achievement of FY2011 EPS growth of not less than 20.0% Weighting 25.00% 5.00% 3.34% 25.00% 5.00% 3.33% 25.00% 5.00% 3.33% 537,634 (May 2010) (a) Entitlement to exercise confi rmed during the year upon the Company agreeing to a 36 month employment contract following completion of an 18 month fi xed term employment contract. (b) The entitlement is subject to continuity of employment and the achievement of predetermined NPAT targets over three years. * *The targets are established as the same targets for the options issued in August 2011 described immediately below. Entire issue vests and is exercisable (subject to the achievement of the conditions) on 1 October 2014. 1,858,829 (August 2011) and 352,942 (October 2011) and 31,250 (March 2012) The options expire four years from the relevant date of issue. The entire issue vests upon the adoption of the Company’s Annual Report for the fi nancial year ended 30 June 2014. The entitlement to exercise these options is subject to continuity of employment and the achievement of predetermined targets, of which 100% is based on NPAT growth targets over three years. The NPAT growth will be based on the actual NPAT achieved for the year ended 30 June 2011 (the ‘Base Year’). The NPAT growth target will be based on compounding growth targets from the Base year. In the event that the NPAT target in any one year is not achieved, at the end of the three year period ending 30 June 2014 the actual compound NPAT over the three year period will be calculated, and if the total exceeds the compound EPS target for the three year period, then the executives will be entitled to exercise all the options which have not been forfeited. The Board retains the right to adjust the NPAT targets in the event of a change in the capital structure of the Company that impacts earnings per share. Any change to the NPAT targets will be made having regard to the actual NPAT impact of the change to the capital structure. In the event that the executives take unpaid leave for a period exceeding three months during any of the years ending 30 June 2012, 2013 or 2014, the vesting criteria outlined above with respect to the fi nancial performance of the Company and the executives continued employment will be determined on a pro rate basis to refl ect the period of their continuous service during the relevant fi nancial year unless the Board in its discretion determine otherwise. The performance hurdles are as follows. Performance Hurdles FY2012 NPAT growth not less than 12.5% FY2013 NPAT growth not less than 15.0% FY2014 NPAT growth not less than 15.0% Vesting portion 33.34% 33.33% 33.33% 8 Retirement Benefi ts - Executives No contracted retirement benefi ts are in place with any of the Company’s executives. Retirement benefi ts may be provided by the Company to executives (including executive directors) from time to time if approved by shareholders (or otherwise provided in accordance with the Corporations Act 2001 (Cth)). Remuneration Details The senior executives specifi ed in the Remuneration Report as key management personnel (as defi ned in AASB124 Related Party disclosures) have, either directly or indirectly, authority and responsibility for planning, directing and controlling the activities of the Group. The Directors do not believe that any other senior employees of the Company or its controlled entities are required to be identifi ed. Details of the remuneration of the Directors and other key management personnel of the Group are set out in the following tables. The key management personnel of the Group are the Directors of McMillan Shakespeare Limited and the executives listed in the table below. Short-term benefi ts Post-employment benefi ts Long-term benefi ts Share-based payments Termination Benefi ts3 Long Service Leave Options4 Total Remuneration Percentage of Remuneration as options $ % 2012 Non-Executive Directors Mr R. Pitcher, AM (Chairman) Mr J. Bennetts (Non-Executive Director) Mr R. Chessari (Non-Executive Director) Mr G. McMahon (Non-Executive Director) Mr A. Podesta (Non-Executive Director) Executive Director Mr M. Kay (CEO5 and Managing Director) Other key management personnel Mr G. Kruyt (Chief Operating Offi cer)6 Mr P. Lang (Group Executive, Customers and Corporate Affairs)7 Mr M. Blackburn (Group CFO and Company Secretary)11 Mr M. Salisbury (Managing Director, Remuneration Services)9 Mr A. Tomas (Managing Director, Fleet and Financial Products)10 Mr P. McCluskey (Group CFO and Company Secretary to 26 October 2011)8 2011 Non-Executive Directors Mr R. Pitcher, AM (Chairman) Mr J. Bennetts (Non-Executive Director) Mr R. Chessari (Non-Executive Director) Mr G. McMahon (Non-Executive Director) Mr A Podesta (Non-Executive Director) Executive Directors Mr M. Kay (CEO5 and Managing Director) Other key management personnel Mr G. Kruyt (Group Executive, Novated Leasing and Fleet Services)6 Mr P. Lang (Group Executive, Salary Packaging)7 Mr P. McCluskey (Group CFO and Company Secretary)8 Mr M Cansdale (Group CFO and Company Secretary) until 31 August 2010 Mr M. Salisbury (General Manager, Remuneration Services)9 Mr A Tomas (Group Executive, Fleet and Novated Leasing.)10 Cash salary/ fees1 $ 167,431 64,220 64,220 60,844 7,729 Cash Bonus Other Benefi ts2 $ - - - - - $ - - - - - Super $ 15,069 5,780 5,780 37,635 62,271 970,334 75,000 15,282 50,000 286,578 85,000 42,264 15,775 252,675 60,000 24,200 15,775 214,474 40,000 181,985 29,851 232,752 50,000 9,040 18,899 437,615 300,000 76,702 25,020 136,782 160,550 64,220 64,220 55,000 38,333 - - - - - - - - - - - - 5,157 14,450 5,780 5,780 40,000 50,000 899,103 100,000 5,166 50,000 245,619 60,000 39,438 14,944 197,567 40,000 48,521 23,955 404,493 50,000 - 24,023 59,224 - 25,942 2,781 200,742 50,000 13,021 19,838 399,030 - 74,022 24,999 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES $ - - - - - - - - - - - - - - - - - - - - - - - - $ - - - - - $ - - - - - 182,500 70,000 70,000 98,479 70,000 4,328 516,036 1,630,980 24,911 67,893 522,421 11,344 64,864 428,858 32 162,609 628,951 2,073 33,983 346,747 95 483 - - - - - 114,707 954,139 3,516 145,938 - - - - - 175,000 70,000 70,000 95,000 88,333 4,290 282,702 1,341,261 6,323 20,228 386,551 8,262 20,228 338,533 20,122 - 498,638 196,923 (111) 284,759 1,494 8,827 293,922 95 111,111 609,257 - - - - - 32% 13% 15% 26% 10% 12% 2% - - - - - 21 5 6 - - 3 18 9 In the case of redundancy, the company Redundancy Policy will apply to the extent that the payment is greater than the payment made to an executive on termination. 1 2 The amounts shown for the Non-Executive Directors refl ect directors’ fees only. The amounts shown for the executives refl ect cash salary and annual leave entitlements. Other benefi ts refl ect motor vehicle lease payments, investment loan repayments, education expenses, travel benefi ts and/or car parking benefi ts. Other than as disclosed in this Annual Report, termination benefi ts include all annual leave and, where applicable, long service leave entitlements that accrued during the fi nancial years 3 ended 30 June 2011 and 30 June 2012. 4 The equity value comprises the value of options issued. No shares were issued to any Director (and no options were granted to any Director) during the fi nancial years ended 30 June 2011 and 30 June 2012. The value of options issued to executives (as disclosed above) are the assessed fair values (less any payment for the options) at the date that the options were granted to the executives, allocated equally over the period from when the services are provided to vesting date. Fair values at grant date are determined using a binomial option pricing model that takes into account the exercise price, the expected term of the option, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. The model inputs for options granted to executives during the fi nancial year ended 30 June 2012 included: Model input Consideration payable upon grant Exercise price Grant date Expected life Share price at grant date Expected price volatility Expected dividend yield Risk-free interest rate 30 June 2012 (August 2011) 30 June 2012 (August 2011) 30 June 2012 (August 2011) (i) 30 June 2012 (October 2011) 30 June 2012 (March 2012) Nil $7.31 $1.32 $7.31 Nil $7.31 Nil $8.54 Nil $9.29 16 August 2011 16 August 2011 16 August 2011 26 October 2011 14 March 2012 3.2 years 3.2 years 3.2 years 3.0 years 2.8 years $7.31 40% 5.3% 3.9% $7.31 40% 5.3% 3.9% $8.54 34% 4.4% 3.9% $8.54 34% 4.4% 3.9% $9.29 42% 4.1% 3.7% (i) These options were granted to Mr M. Kay in August 2011 and subsequently approved by shareholders at the Annual General Meeting on 25 October 2011. 5 The current employment agreement between Mr Kay and the Company commenced on 9 September 2011 and is for a fi xed term ending 31 August 2014. The agreement provides for termination of employment by either party without cause on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may also be terminated by the Company for cause without notice or any payment. Mr Kay served as an executive at all times during the fi nancial year ended 30 June 2012. The current employment agreement between Mr Kruyt and the Company commenced on 3 October 2011 and is ongoing. The agreement provides for termination of employment by 6 either party on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Kruyt served as an executive at all times during the fi nancial year ended 30 June 2012. 7 The current employment agreement between Mr Lang and the Company commenced on 12 September 2011 and is ongoing. The agreement provides for termination of employment by either party on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Lang served as an executive at all times during the fi nancial year ended 30 June 2012. 8 The employment agreement between Mr McCluskey and the Company was varied with effect from 1 September 2010 to appoint Mr McCluskey as Group Chief Financial Offi cer and Company Secretary. Mr McCluskey resigned from this position on 26 October 2011. The agreement provided for termination of employment by either party with two month’s notice. The agreement was able to be terminated by the Company for cause without notice or any payment. Mr McCluskey served as an executive until 26 October 2011. 9 The employment agreement between Mr Salisbury and the Company commenced on 1 July 2008 and is ongoing. The agreement provides for termination of employment by either party with 12 weeks’ notice. The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Salisbury served as an executive at all times during the fi nancial year ended 30 June 2012. 10 The current employment agreement between Mr Tomas and the Company commenced on 3 October 2011 and is for a fi xed term ending 30 September 2014. The agreement provides for termination of employment by either party without cause with six month’s notice in writing (in the case of the Company, subject to a termination payment). The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Tomas served as an executive at all times during the fi nancial year ended 30 June 2012. Included in cash bonus is $250,000 that was paid during the year pursuant to the completion of the Interleasing STI program which was established to reward certain achievements in relation to the acquisition of Interleasing (Australia) Limited (see page 6). 11 The employment agreement between Mr Blackburn and the Company commenced on 10 October 2011 and is for a fi ve year fi xed term. The agreement provides for termination of employment by either party without cause on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may also be terminated by the Company for cause without notice or any payment. Mr Blackburn served as an executive from October 2011. 10 Remuneration at risk The relevant proportions of remuneration that are linked to performance and those that are fi xed are as follows: Executive Directors Mr M. Kay Other key management personnel Mr G. Kruyt Mr P. Lang Mr P. McCluskey1 Mr M. Blackburn2 Mr M. Salisbury Mr A. Tomas Fixed remuneration At risk - STI At risk - LTI 2012 2011 2012 2011 2012 2011 64% 71% 71% 98% 68% 76% 57% 72% 79% 82% 90% - 80% 82% 4% 16% 14% - 6% 14% 31% 7% 16% 12% 10% - 17% - 32% 13% 15% 2% 26% 10% 12% 21% 5% 6% - - 3% 18% 1 2 Mr McCluskey resigned as Group Chief Financial Offi cer and Company Secretary on 26 October 2011. Mr Blackburn commenced as Group Chief Financial Offi cer on 10 October 2011 and Company Secretary from 26 October 2011. Consequences of performance on shareholders’ wealth In addition to the links between remuneration and shareholder value discussed above, when reviewing the Group’s performance and benefi ts for shareholder wealth, and the link to the remuneration policy, the following indices are generally considered: Indices 2012 2011 2010 2009 2008 Net profi t attributable to Company members $54,305,163 $43,460,470 $44,959,784 $20,522,752 $17,368,000 NPAT growth (1) Dividends paid Share price as at 30 June Earnings per share 25.0% 55.7% 36.0% 18.2% 31.2% $31,422,422 $20,388,246 $13,854,604 $11,827,100 $10,451,000 $11.82 $9.58 $4.69 $2.92 $2.46 76.6 cents 64.0 cents 66.5 cents 30.4 cents 25.8 cents 1 NPAT growth in 2011 and 2010 have excluded the gain on acquisition of Interleasing (Australia) Limited in April 2010 of $17,055,000. Net profi t is considered as part of the fi nancial performance targets in setting short term incentives. Dividends, changes in share price, return on equity and earnings per share are all taken into account when setting the ‘at risk’ components of executive remuneration. The overall level of executive compensation takes into account the performance of the Group over a number of years. The Group’s profi t from ordinary activities after tax and earnings per share has grown at a compound annual growth rate (CAGR) of 32.6% per annum over the period from 1 July 2007 until 30 June 2012 (excluding the gain on business combination). Over the same period return on equity (RoE) exceeded 35%. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 11 Option Details No options were granted to, exercised by or lapsed with respect to Non-Executive Directors during the years ended 30 June 2012 or 30 June 2011. The terms and conditions of each grant of options to executives affecting their remuneration in the fi nancial year ended 30 June 2012 and each relevant previous or future fi nancial year are as follows. Grant Date Expiry Date 21 December 2007 20 December 2011 1 July 2008 30 June 2012 24 November 2008 23 November 2012 24 November 2008 23 November 2012 28 May 2010 1 October 2015 16 August 2011 30 September 2015 16 August 2011(2) 30 September 2015 25 October 2011 30 September 2015 14 March 2012 30 September 2015 Share price at valuation date Exercise Price Value per option at grant date1 Date Exercisable $4.00 $2.59 $2.10 $2.10 $3.42 $7.31 $8.54 $8.54 $9.29 $4.52 $4.70 $4.70 $3.40 $3.42 $7.31 $7.31 $8.54 $9.29 $0.525 $0.240 $0.090 $0.180 $0.930 $1.759 $2.310 $1.870 $2.400 100% after 15 September 2008 100% after 16 September 2011 100% after 24 November 2011 100% after 24 November 2011 100% after 1 October 2014 100% after 7 September 2014 100% after 7 September 2014 100% after 7 September 2014 100% after 7 September 2014 1 2 Refl ects the value at grant date for options granted as part of remuneration calculated in accordance with AASB 2: Share-based Payment. These options were issued to the Managing Director on 16 August 2011 and valued on the day of approval by shareholders at the Annual General Meeting on 25 October 2011. Details of the options granted, vested and exercised during the fi nancial years ended 30 June 2012 and 30 June 2011 with respect to the executives are set out in the table below. No amounts are unpaid on any shares issued on the exercise of options. Options granted Options vested Ordinary shares issued on exercise of options Executive Directors Mr M. Kay Other key management personnel Mr G. Kruyt Mr P. Lang Mr P. McCluskey Mr M. Blackburn Mr M. Salisbury Mr A. Tomas 1 Including options sold by executives prior to exercise. 2012 720,106 197,538 189,556 123,177 352,942 85,276 37,901 2011 2012 2011 2012(1) - - - - - - - 3,750,000 625,000 625,000 - - 136,364 - - - - - - - 3,750,000 625,000 625,000 - - 136,364 - 2011 - 90,000 40,000 - - - - The percentage of options granted to executives that have vested or were forfeited during the fi nancial year ended 30 June 2012 is set out below: Financial year granted 2009 2012 2009 2012 2009 2012 2009 2012 2012 2012 2010 Vested % 100% - 100% - 100% - 100% - - - - Executive Directors Mr M. Kay Mr M. Kay Other key management personnel Mr G. Kruyt Mr G. Kruyt Mr P. Lang Mr P. Lang Mr M. Salisbury Mr M. Salisbury Mr M. Blackburn Mr P. McCluskey Mr A. Tomas 12 Forfeited % Financial year(s) in which options may vest - - - - - - - - - - - - 2015 - 2015 - 2015 - 2015 2015 2015 2015 Details of the value of options granted, exercised or lapsed during the fi nancial year ended 30 June 2012 with respect to the executives are as follows: Value at grant date(1) Discount paid at grant date (2) Value at exercise date(3) Value at lapse date(4) Minimum value of option to vest Maximum value of option to vest Executive Directors Mr M. Kay Other key management personnel Mr G. Kruyt Mr P. Lang Mr M. Blackburn Mr P. McCluskey Mr M. Salisbury Mr A. Tomas $ $ $ 1,663,445 (50,000) 16,730,326 347,469 333,429 660,002 216,668 150,000 66,668 (50,000) (50,000) - (50,000) - (50,000) 2,764,204 2,799,894 - - 732,885 - $ - - - - - - - $ - - - - - - - $ 1,149,310 211,897 201,895 497,392 118,723 106,850 261,874 1 2 3 4 Refl ects the value at grant date for options granted as part of remuneration during the fi nancial year ended 30 June 2012 calculated in accordance with AASB 2: Share-based Payment. Refl ects payments by executives to purchase voluntary options at grant date (refer Voluntary Option note on page 7) Refl ects the value at exercise date for options that were granted as part of remuneration and were sold or exercised during the fi nancial year ended 30 June 2012. Refl ects the value at lapse date for options that were granted as part of remuneration and lapsed during the fi nancial year ended 30 June 2012. OPTIONS GRANTED During the fi nancial year ended 30 June 2012, options were granted by the Company to directors and key management personnel as part of their remuneration as follows: Number granted Class of option Date of grant Exercise price Expiry date Issue Price Executive Directors Mr M. Kay Mr M. Kay Key management personnel Mr G. Kruyt Mr G. Kruyt Mr P. Lang Mr P. Lang Mr M. Blackburn Mr P. McCluskey Mr P. McCluskey Mr M. Salisbury Mr A. Tomas 682,206 Performance 25 October 2011 37,900 Voluntary 25 October 2011 159,637 Performance 16 August 2011 37,901 Voluntary 16 August 2011 151,655 Performance 16 August 2011 37,901 Voluntary 16 August 2011 352,942 Performance 25 October 2011 85,276 37,901 85,276 37,901 Performance 16 August 2011 Voluntary 16 August 2011 Performance 16 August 2011 Voluntary 16 August 2011 $7.31 $7.31 $7.31 $7.31 $7.31 $7.31 $8.54 $7.31 $7.31 $7.31 $7.31 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 Nil $1.32 Nil $1.32 Nil $1.32 Nil Nil $1.32 Nil $1.32 No person holding an option has or had, by virtue of the option, a right to participate in a share issue of any other corporation. UNISSUED SHARES At the date of this Annual Report, unissued ordinary shares of the Company under option are: Option class Performance Options Performance Options Voluntary Options Performance Options Performance Options Performance Options(i) No. of unissued ordinary shares Exercise price 537,634 1,858,829 314,578 352,942 31,250 121,331 $3.42 $7.31 $7.31 $8.54 $9.29 $11.42 (i) Performance options issued since the end of the fi nancial year ended 30 June 2012. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Expiry date 1 October 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 13 DIRECTORS’ INTERESTS At the date of this Annual Report, the relevant interest of each Director in the securities issued by the Company and its controlled entities, as notifi ed by the Directors to the Australian Stock Exchange Limited (ASX) in accordance with section 205G(1) of the Corporations Act 2001 (Cth), is as follows: Director Mr R. Pitcher, AM (Chairman) Mr M. Kay (Managing Director) Mr J. Bennetts Mr R. Chessari Mr G. McMahon Mr A. Podesta Options - 720,106 - - - - Ordinary shares 41,871 1,444,952 4,184,025 6,225,063 122,000 7,235,000 No Director has, during the fi nancial year ended 30 June 2012, become entitled to receive any benefi t (other than a benefi t included in the aggregate amount of remuneration received or due and receivable by the Directors shown in the Remuneration Report or the fi xed salary of a full time employee of the Company) by reason of a contract made by the Company or a controlled entity with the Director or an entity in which the Director has a substantial fi nancial interest or a fi rm in which the Director is a member. ENVIRONMENTAL REGULATIONS The Directors believe that the Company and its controlled entities have adequate systems in place for the management of relevant environmental requirements and are not aware of any breach of those environmental requirements as they apply to the Company and its controlled entities. INDEMNIFICATION AND INSURANCE Under the Company’s Constitution, the Company indemnifi es the Directors and offi cers of the Company and its wholly-owned subsidiaries to the full extent permitted by law against any liability and all legal costs in connection with proceedings incurred by them in their respective capacities. The Company has also entered into a Deed of Access, Indemnity and Insurance with each Director, each Company Secretary, and each responsible manager under the licenses which the Company holds (Deed), which protects individuals acting as offi ceholders during their term of offi ce and after their resignation. Under the Deed, the Company also indemnifi es each offi ceholder to the full extent permitted by law. The Company has a Directors & Offi cers Liability Insurance policy in place for all current and former offi cers of the Company and its controlled entities. The policy affords cover for loss in respect of liabilities incurred by Directors and offi cers where the Company is unable to indemnify them and covers the Company for indemnities provided to its Directors and offi cers. This does not include liabilities that arise from conduct involving dishonesty. The Directors have not included the details of premium paid with respect to this policy as such disclosure is not permitted under the terms of the policy. NON-AUDIT SERVICES Details of the amounts paid or payable to the auditor of the Company, Grant Thornton Audit Pty Ltd and its related practices, for non-audit services provided, during the fi nancial year ended 30 June 2012, is disclosed in Note 4 to the Financial Statements. The Company’s policy is that the external auditor is not to provide non-audit services unless the Audit Committee has approved that work in advance, as appropriate. The Audit Committee has reviewed a summary of non-audit services provided during the fi nancial year ended 30 June 2012 by Grant Thornton Audit Pty Ltd. Given that the only non-audit services related to client contract audits, and vehicle compliance and payroll systems audits the Audit Committee has confi rmed that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). This has been formally advised to the Board. Consequently, the Directors are satisfi ed that the provision of non-audit services during the year by the auditor and its related practices did not compromise the auditor independence requirements of the Corporations Act 2001 (Cth). 14 AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration, as required under section 307C of the Corporations Act 2001 (Cth), is set out on page 63 of this Annual Report. CORPORATE GOVERNANCE PRACTICES A Corporate Governance Statement is set out on pages 16 to 20 of this Annual Report. Signed in accordance with a resolution of the Directors. Ronald Pitcher, AM Chairman 6 September 2012 Melbourne, Australia Michael Kay Managing Director McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 15 CORPORATE GOVERNANCE STATEMENT INTRODUCTION This statement outlines the corporate governance policies and practices formally adopted by the Company. These policies and practices are in accordance with the ASX Corporate Governance Council’s ‘Corporate Governance Principles and Recommendations’ (ASX Principles), unless otherwise stated. ROLE OF THE BOARD The role of the Board is to provide strategic guidance for the Group and effective oversight of management. The Board operates in accordance with the Company’s Constitution, Board Charter and Delegated Authority Matrix, which describe the Board’s composition, functions and responsibilities and designates authority reserved to the Board and that delegated to management. The Board Charter can be accessed on the Company’s website (www.mmsg.com.au). COMPOSITION OF THE BOARD As at the date of this Annual Report, the Directors are as follows: Name Mr R. Pitcher, AM Mr M. Kay Mr J. Bennetts Mr R. Chessari Mr G. McMahon Mr A. Podesta Position Independent Chairman Managing Director and Chief Executive Offi cer Non-Executive Director Non-Executive Director Independent Non-Executive Director Non-Executive Director Appointment 4 February 2004 15 July 2008 1 December 2003 1 December 2003 18 March 2004 1 December 2003 Each Director is a senior executive with the skills and experience necessary for the proper supervision and leadership of the Company. As a team, the Board brings together a broad range of qualifi cations and experience in remuneration services, fi nancial services, fi nance, accounting, law, sales and marketing and public company affairs. Details of the Directors, their experience and their special responsibilities with respect to the Company are set out in the Directors’ Report. The Board considers a Director independent if that person is free of management and other business relationships that could materially interfere, or could reasonably be perceived to materially interfere, with the exercise of objective and independent judgement. More information can be obtained from the Group’s Policy on the Independence of Directors which can be accessed on the Company’s website. The Chairman determines the relevant materiality thresholds on a case by case basis with reference to both quantitative and qualitative bases. The ASX Guidelines recommend that a listed company should have a majority of directors who are independent. The Board, as currently composed, does not comply with this recommendation. Mr Chessari and Mr Bennetts currently hold, through their controlled entities, approximately 8.4% and 5.8% respectively of the shares in the Company. These Directors have participated in the growth and development of McMillan Shakespeare and have a signifi cant interest in the Company’s continued success. Given their history and skills, the Board believes that it is appropriate for each of these Directors to be appointed to the Board. Despite stepping down as CEO in the year ended 30 June 2008, and resigning as an Executive Director on 17 August 2010, Mr Podesta continues as a Director of the Company. As the founder of the Company, and with over 20 years experience in the remuneration services industry, Mr Podesta brings a wealth of experience and an in-depth knowledge of the Group’s operations and customers to the Board. As the Company’s largest shareholder, he also has a signifi cant interest in the Company’s continued success. As such, the Board believes that it is appropriate for Mr Podesta to remain on the Board as a non-independent Director. The Company believes that the Board, as currently composed, has the necessary skills and motivation to ensure that it continues to perform strongly notwithstanding that its overall composition does not specifi cally meet the ASX Principles. Details of the experience of the Directors is contained in the Directors’ Report. The Chairman is responsible for leading the Board ensuring Directors are properly briefed in all matters relevant to their role and responsibilities, facilitating Board discussions and managing the Board’s relationships with the Company’s senior executives. The Chief Executive Offi cer is responsible for implementing Group strategies and policies. The Board Charter specifi es that these are separate roles to be undertaken by separate people. BOARD PRACTICES The Board meets regularly to evaluate, control, review and implement the Company’s operations and objectives. The Directors receive monthly reports from the Chief Executive Offi cer, the Chief Financial Offi cer and operational managers. A Director, subject to prior approval of the Chairman or, in the absence of that approval, the Board may seek independent professional advice (including legal advice) at the Company’s expense to assist them in carrying out their duties and responsibilities. 16 PERFORMANCE REVIEW The Board has delegated the responsibility for evaluating the performance of the Board, the Directors and the Board Committees to the Chairman. The performance evaluation includes the examination of the performance of the Board and the individual Directors against the Board Charter. The evaluation may establish goals and objectives for the Board and provide any recommendations for improvement to Board performance as it sees fi t. The Chairman undertook the performance appraisal of the Board, the individual Directors and the Board Committees with respect to the fi nancial year ended 30 June 2012 in July 2012. The Board has delegated the responsibility for evaluating the performance of executive management to the Remuneration Committee and CEO. Given the size of the Company’s operations, the Board has decided against the establishment of a separate nomination committee at this time. As such, the responsibility for the selection and nomination of new Directors remains with the full Board. REMUNERATION COMMITTEE The Board has established a Remuneration Committee, which is structured so that the committee is chaired by an independent director and consists of at least three members all of whom are Non-Executive Directors. Details of names and relevant qualifi cations of the Directors appointed to the Remuneration Committee, the number of meetings of the committee held during the year ended 30 June 2012 and the attendance record for each relevant member can be found in the Directors’ Report. The Remuneration Committee is empowered to investigate any matter brought to its attention and has direct access to any employee or any independent expert and adviser as it considers appropriate in order to ensure that its responsibilities can be carried out effectively. The Remuneration Committee has a documented charter approved by the Board. The charter can be accessed on the Company’s website. The CEO carries out half-yearly performance reviews with each member of the senior executive team, comparing the individual’s performance against their agreed performance targets. This process was completed for the year ended 30 June 2012 with the CEO’s report to the 24 July 2012 meeting of the Remuneration Committee. The Remuneration Committee has evaluated the performance of the Chief Executive Offi cer for the year ended 30 June 2012, taking account of the performance of the Group and other non-fi nancial outcomes. The ASX Principles recommend that the majority of members of the Remuneration Committee should be independent. The Remuneration Committee, as currently composed, does not comply with this recommendation. At present, the Remuneration Committee is comprised of four members, two of whom are not independent. Mr Chessari and Mr Bennetts have participated in the growth and development of McMillan Shakespeare and have a signifi cant interest in the Company’s continued success. Given their management experience and skills, the Board believes that it is appropriate for each of these Directors to be appointed to the Remuneration Committee. AUDIT COMMITTEE The Board has established an Audit Committee, which is structured so that the committee is chaired by an independent director and consists of at least three members, all of whom are Non-Executive Directors. Details of the names and relevant qualifi cations of the Directors appointed to the Audit Committee, the number of meetings of the committee held during the year ended 30 June 2012 and the attendance record for each relevant member can be found in the Directors’ Report. The Audit Committee is empowered to investigate any matter brought to its attention and has direct access to any employee, the independent auditors or any other independent experts and advisers as it considers appropriate in order to ensure that its responsibilities can be performed effectively. The Audit Committee has a documented charter approved by the Board. The charter can be accessed on the Company’s website. The ASX Listing Rules require that the majority of members of the Audit Committee should be independent and that a person who is not the Chairman of the Board should chair the committee. The Audit Committee, as composed during the fi nancial year ended 30 June 2012 did not comply with these requirements at all times. The Board believes that during the fi nancial year ended 30 June 2012, the Audit Committee had appropriate fi nancial expertise with all members being fi nancially literate and having a deep understanding of the industry in which the Company operates. The Audit Committee was comprised of four members, only two of whom were independent. Mr Chessari and Mr Bennetts have participated in the growth and development of McMillan Shakespeare and have a signifi cant interest in the Company’s continued success. Given their management experience, skills and the size of their investment in the Company, the Board believed that it was appropriate for each of these Directors to be appointed to the Audit Committee. In addition, during the fi nancial year ended 30 June 2012, the Audit Committee was chaired by Mr Pitcher who, while independent, is also the Chairman of the Board. Mr Pitcher is a chartered accountant with over 45 years experience in the accounting profession and the provision of business advisory services. Given the Company’s highly specialised activities and Mr Pitcher’s extensive accounting and business experience, the Board believed that Mr Pitcher was the most appropriate person to chair the Audit Committee. The external auditor together with the Chief Executive Offi cer, Chief Financial Offi cer and Mr Podesta are invited to attend the meetings. The Audit Committee also meets with the external auditor twice a year without management to provide the auditor the opportunity to provide feedback on the conduct of the audit and management. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 17 On 25 June 2012, the composition of the Audit Committee changed and conforms to the ASX Listing Rules. Mr Pitcher resigned as Chairman and Mr McMahon was appointed as the Chairman. Mr Chessari resigned as a member of the Audit Committee. The Audit Committee as currently composed consists of a majority of members that are independent and a person who is not the Chairman of the Board is chair of the Audit Committee. The Company has adopted procedures for the selection and appointment of the external auditor, and the rotation of external audit engagement partners in line with the Corporations Act 2001 (Cth). FINANCIAL REPORTING & RISK MANAGEMENT Given the nature and size of the Company’s operations, the Board has decided against the establishment of a separate Board risk management committee at this time, and risk management remains a direct responsibility of the full Board. As such, the Board has ultimate responsibility for the integrity of the Company’s fi nancial reporting. As part of the Group’s risk management processes, senior management attend a monthly Risk and Compliance Committee, which is supported by internal control processes for identifying, evaluating and managing signifi cant fi nancial, operational and compliance risks to the achievement of the Company’s objectives, which are subject to Board oversight from time to time. In addition, an independent external party has been appointed to provide internal audit services as required from time to time. The Company has reviewed its formal Risk Management Policy and Framework during the year, and the Credit Committee and Interest Committee met on a monthly basis during the year. The Risk Management Policy and Framework are accessible to all staff on the Group’s intranet and identify the material risks affecting the Company and the manner in which each of those risks will be managed. A copy of the Company’s Risk Management Policy can be accessed on the Company’s website. Considerable importance is placed on maintaining a strong control environment. There is an organisation structure with clear lines of accountability and delegation of authority. Adherence to the Director and Employee Codes of Conduct is required at all times and the Board actively promotes a culture of quality and integrity. The Directors have received and considered written representations from the Chief Executive Offi cer and the Chief Financial Offi cer in accordance with the ASX Principles. The written representations confi rmed that: • • the fi nancial reports are complete and present a true and fair view, in all material respects, of the fi nancial condition and operating results of the Company and its controlled entities and are in accordance with all relevant accounting standards; and the above statement is founded on a sound system of risk management and internal compliance and control that implements the policies adopted by the Board and that compliance and control is operating effi ciently and effectively in all material respects. The Company’s external auditor has been invited to attend the Annual General Meeting and be available to answer questions from the members of the Company about the conduct of the audit and the preparation and content of the Independent Audit Report. REMUNERATION POLICY The Company’s remuneration policy is structured to ensure that the reward for performance is competitive and appropriate for the results delivered. Further, it aims to ensure that remuneration packages properly refl ect the duties and responsibilities and level of performance of the staff member and that the remuneration is competitive in attracting, retaining and motivating people of the highest quality. Non-executive Directors are remunerated by way of fees and do not participate in profi t or incentive schemes and do not generally receive options, incentive payments or retirement benefi ts other than statutory superannuation. Executive remuneration generally comprises the following elements: • • fi xed remuneration, including superannuation and benefi ts, which is set at a level that refl ects the marketplace for each position; long-term equity-linked performance incentives, in the form of share options, which incorporate exercise restrictions based on continuity of employment and the achievement of certain individual and fi nancial performance hurdles. Cash bonuses may also be issued at the discretion of the Board. The Company does not generally offer contracted cash bonuses as part of a short term incentive program, but may do so in special circumstances. Further details of the Company’s remuneration policies and practices in relation to the Directors and executives can be found in the Directors’ Report under the heading ‘Remuneration Report’. COMMUNICATION WITH SHAREHOLDERS AND THE MARKET The Company’s commitment to communicating with its shareholders is embodied in its Shareholder Communication Policy and its Continuous Disclosure Policy, which contain policies and procedures on information and disclosure to facilitate continuous disclosure of any information concerning the Group that a reasonable person would expect to have a material effect on the price of the Company’s securities. The Company’s Continuous Disclosure Policy and the Shareholder Communication Policy can be accessed on the Company’s website. In addition to the distribution of the Annual Report, information is communicated to shareholders via the announcements section of the Company’s website. 18 ETHICS AND CODES OF CONDUCT The Company has adopted a Director Code of Conduct that applies to the Directors of the Company. The Director Code of Conduct refl ects the commitment of the Company to ethical standards and practices. The Director Code of Conduct can be reviewed on the Company’s website. The Company has also adopted an extensive Employee Code of Conduct that applies to all employees of the Company, which acknowledges the need for, and continued maintenance of, the highest standard of ethics and seeks to ensure that employees act honestly, transparently, diligently and with integrity. A summary of the Employee Code of Conduct can be accessed on the Company’s website. The Company has also implemented a policy on securities trading that binds all of the Group’s offi cers and employees. In addition to ensuring that all offi cers and employees are aware of the legal restrictions on trading in the Company’s securities whilst in possession of unpublished price-sensitive information, the policy also places restrictions on when Directors and employees can deal in the Company’s securities and requires the Directors and certain employees to notify the Company Secretary upon dealing in the Company’s securities. The policy can be accessed on the Company’s website. The Company has adopted a Whistleblower Policy, which is designed to ensure that employees of the Group can raise concerns in good faith regarding actual or suspected improper conduct or malpractice in the Group, without fear of reprisal or feeling threatened by doing so. The policy can be accessed on the Company’s website. The Company has an Equal Opportunity & Diversity Policy which assists in confi rming the Company’s commitment to a diverse workforce, ensuring there is ongoing development and implementation of relevant plans, programs and initiatives to recognise and promote diversity, and in establishing the process for appropriate reporting. The policy can be accessed on the Company’s website. The Board encourages and supports the Company’s commitment to ensuring a work environment that provides equal opportunity for all. Equal opportunity protects the principle that every person has the right to be treated fairly. The Company fosters an environment which encourages and values diversity in the workplace. The Company applies merit based policies and practices, and believes that the application of these achieves diversity outcomes. A number of targeted measurable objectives have been approved by the Board in order to assist monitoring and application of the Company’s approved policies. The details of the measurable objectives selected for the fi nancial year 30 June 2012 and the report against them is contained below. Objective 1 Appropriate action to be taken on any complaints, breaches or recommendations on issues related to EEO or diversity as set out in the Company’s EEO & Diversity Policy (‘Diversity Recommendations’). The Company will take action within one week of Diversity Recommendation being raised. The Company Diversity related issues, complaints or breaches could be raised by way of the Whistleblower Policy (either as a complaint or a recommendation), the incident and breach reporting policy, under the EEO & Diversity policy, or other related policies (for example, as part of performance management). Objective 2 100% Diversity Recommendations are to be disclosed in summary form to the Risk & Compliance Committee and the Board. Report against Objectives 1 and 2: Number of Diversity Recommendations received % of Recommendations actioned within 1 week % of Recommendations reported & considered by the Risk & Compliance Committee and the Board 1 Objective 3 100% 100% Bi - annual review to be conducted by the Risk & Compliance Committee and the Board of the workplace gender profi le: a. As part of the lodgement by MMS of its annual report to the Equal Opportunity for Women in the Workplace Agency on their workplace program for women; and b. As part of the annual review by the Board of talent and succession planning. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 19 Report against Objective 3 The Board confi rms it has considered the workplace gender profi le bi-annually, including reviewing the workplace profi le submitted to the Equal Opportunity for Women in the Workplace Agency and as part of the Company’s talent and succession planning process. The Company’s Risk & Compliance Committee has considered the workplace gender profi le. The Company’s workplace gender profi le as at March 2012 is set out below: Senior Executives Senior Management/ Specialists Managers/Specialists Team Leaders Admin/Support Staff Sales Staff Service Staff Total Women Men Casual % Full Time Part Time Full Time Part Time Women Men Total Women 2 7 21 23 70 58 135 316 - 2 4 - 13 5 29 53 10 16 47 16 44 89 106 328 - 1 2 - 2 - 6 11 - - - - - - 11 11 - - - - - - 7 7 12 26 74 39 129 152 294 726 17% 35% 34% 59% 64% 41% 60% 52% Men 83% 65% 66% 41% 36% 59% 40% 48% There are currently no female directors on the Company Board. In Board appointments, the Company is committed to merit based selection. In selecting new Directors, the Board has regard to skills, experience and perspectives represented on the Board. The Board has developed an appointment process which takes diversity of background into account (in addition to skills and experience) to fi t and enhance the Board’s skill mix. Objective 4 There will be an Annual Review by the Board of the EEO & Diversity Policy and the measurable objectives. Reporting against Objective 4 The Board confi rms it has undertaken an annual review of the EEO & Diversity Policy, and to the extent it deems necessary or appropriate, changes have been made. The Board has reviewed the measurable objectives for the fi nancial year ended 30 June 2013, and has determined to maintain the existing measurable objectives for that year. 20 STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2012 Revenue and other income Employee and director benefi t expenses Depreciation and amortisation expenses and impairment Leasing and vehicle management expenses Consulting expenses Marketing expenses Property and corporate expenses Technology and communication expenses Other expenses Finance costs Profi t before income tax Income tax (expense) / benefi t Profi t attributable to members of the parent entity Other comprehensive income Changes in fair value of cash fl ow hedges Exchange differences on translating foreign operations Income tax on other comprehensive income Total other comprehensive loss for the period Total comprehensive income for the period Basic earnings per share (cents) Diluted earnings per share (cents) Consolidated Group Parent Entity Note 3 4(a) 4(a) 5(b) 6 6 2012 $’000 2011 $’000 302,030 271,305 (65,676) (71,766) (50,850) (2,523) (3,004) (5,346) (7,319) (7,811) (10,385) 77,350 (23,045) 54,305 (1,135) (3) 339 (799) 53,506 76.6 74.1 (55,336) (68,061) (52,434) (1,541) (2,671) (4,942) (5,594) (7,250) (11,278) 62,198 (18,738) 43,460 (306) - 92 (214) 43,246 64.0 61.2 2012 $’000 16,884 (557) - - (49) - (262) - - (766) 15,250 438 15,688 - - - - 2011 $’000 21,133 (1,018) - - (88) - (201) - (131) (1,814) 17,881 (217) 17,664 - - - - 15,688 17,664 The above statements of comprehensive income should be read in conjunction with the accompanying notes. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 21 STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 2012 Current assets Cash and cash equivalents Trade and other receivables Finance lease receivables Inventory Prepayments Total current assets Non-current assets Finance lease receivables Other fi nancial assets Property, plant and equipment Deferred tax assets Intangible assets Total Non-current assets TOTAL ASSETS Current liabilities Trade and other payables Current tax liability Provisions Borrowings Total current liabilities Non-current liabilities Provisions Borrowings Total Non-current liabilities TOTAL LIABILITIES NET ASSETS Equity Issued capital Reserves Retained earnings TOTAL EQUITY Note 8 9 10 10 11 13 14 15 16 17 18 19 18 19 Consolidated Group Parent Entity 2012 $’000 54,420 18,914 6,043 1,980 3,238 84,595 9,518 - 252,966 1,683 42,449 306,616 2011 $’000 15,034 14,031 3,748 1,477 1,489 35,779 4,200 - 219,440 1,240 39,849 264,729 2012 $’000 7,319 72 - - - 7,391 2011 $’000 506 342 - - 72 920 - - 102,230 100,863 - 160 - - 71 - 102,390 100,934 391,211 300,508 109,781 101,854 57,771 4,323 4,830 - 66,924 45,285 6,752 4,023 2,949 59,009 425 155,811 156,236 448 126,539 126,987 42,491 4,323 - - 46,814 - - - 30,990 6,752 - 2,949 40,691 - 13,917 13,917 223,160 185,996 46,814 54,608 168,051 114,512 62,967 47,246 20(a) 56,456 573 111,022 25,053 1,320 88,139 56,456 1,586 4,925 25,053 1,534 20,659 168,051 114,512 62,967 47,246 The above statements of fi nancial position should be read in conjunction with the accompanying notes. 22 STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2012 Equity as at 30 June 2011 25,053 88,139 2012 Equity as at beginning of year Profi t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Issue of shares and options Transfer on exercise of options Option expense Dividends paid Equity as at 30 June 2012 2011 Equity as at beginning of year Profi t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Issue of shares Transfer on exercise of options Option expense Dividends paid Note 7 7 2012 Equity as at beginning of year Profi t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Issue of shares Transfer on exercise of options Option expense Dividends paid Equity as at 30 June 2012 2011 Equity as at beginning of year Profi t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Issue of shares Transfer on exercise of options Option expense Dividends paid Note 7 7 Consolidated Group Issued capital $’000 25,053 - - - 30,088 1,315 - - Retained Earnings $’000 88,139 54,305 - 54,305 - - - (31,422) Option Reserve $’000 1,534 - - - - (1,315) 1,367 - Cash fl ow Hedge Reserve $’000 (214) - (796) (796) - - - - Foreign Currency Translation Reserve $’000 - - (3) (3) - - - - Total $’000 114,512 54,305 (799) 53,506 30,088 - 1,367 (31,422) 56,456 111,022 1,586 (1,010) (3) 168,051 23,066 - - - 1,755 232 - - 65,067 43,460 - 43,460 - - - (20,388) 1,284 - - - - (232) 482 - 1,534 - - (214) (214) - - - - (214) - - - - - - - - - Issued capital $’000 25,053 - - - 30,088 1,315 - - Parent Entity Retained Earnings $’000 20,659 15,688 - 15,688 - - - (31,422) Option Reserve $’000 1,534 - - - - (1,315) 1,367 - Cash fl ow Hedge Reserve $’000 - - - - - - - - 56,456 4,925 1,586 23,066 - - - 1,755 232 - - 23,383 17,664 - 17,664 - - - (20,388) 1,284 - - - - (232) 482 - 1,534 - - - - - - - - - - 89,417 43,460 (214) 43,246 1,755 - 482 (20,388) 114,512 Total $’000 47,246 15,688 - 15,688 30,088 - 1,367 (31,422) 62,967 47,733 17,664 - 17,664 1,755 - 482 (20,388) 47,246 23 Equity as at 30 June 2011 25,053 20,659 The above statements of changes in equity should be read in conjunction with the accompanying notes. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2012 Cash fl ows from operating activities Receipts from customers Payments to suppliers and employees Proceeds from sale of assets under lease Payments for assets under lease Interest received Interest paid Dividends received Income taxes (paid) / received Net cash from operating activities Cash fl ows from investing activities Acquisition expenses Payment for capitalised software Payments for plant and equipment Proceeds from sale of plant and equipment Net cash used in investing activities Cash fl ows from fi nancing activities Equity contribution Dividends paid by parent entity Proceeds from borrowings Repayment of borrowings Payment of borrowing costs Proceeds from controlled entities Net cash provided by / (used in) fi nancing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Consolidated Group Parent Entity Note 2012 $’000 2011 $’000 2012 $’000 2011 $’000 22 15(b) 7 276,610 264,627 (112,015) (126,605) 52,343 43,646 (163,620) (113,181) 1,391 (9,164) - (25,517) 20,028 - (3,370) (1,830) - 767 (12,294) - (21,438) 35,522 (216) (2,694) (2,875) 8 (5,200) (5,777) - (785) - - 94 (730) 16,734 1 15,314 - - - - - - (1,101) - - 33 (2,302) 9,500 (713) 5,417 (216) - - - (216) 30,088 (31,422) 61,000 (35,000) (108) - 24,558 39,386 15,034 1,755 (20,388) 5,000 30,088 (31,422) - 1,755 (20,388) - (17,727) (17,000) (13,000) (108) - (31,468) (1,723) 16,757 - 9,833 (8,501) 6,813 506 - 25,533 (6,100) (899) 1,405 Cash and cash equivalents at end of year 8 54,420 15,034 7,319 506 The above statements of cash fl ows should be read in conjunction with the accompanying notes. 24 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General information The fi nancial report of McMillan Shakespeare Limited and its controlled entities for the year ended 30 June 2012 was authorised for issue in accordance with a resolution of the directors on 6 September 2012 and covers McMillan Shakespeare Limited (“the Company” or the “parent entity”) as an individual entity as well as “the Consolidated Group”, consisting of McMillan Shakespeare Limited and its subsidiaries (‘the Group”) as required by the Corporations Act 2001. The fi nancial report is presented in Australian currency, which is the Consolidated Group’s functional and presentation currency. McMillan Shakespeare Limited is a company limited by shares and domiciled in Australia, whose shares are publicly traded on the Australian Stock Exchange. (b) Basis of preparation The fi nancial report is a general purpose fi nancial report which has been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board (AASB), and Corporations Act 2001. McMillan Shakespeare Limited is a for-profi t entity for the purpose of preparing the fi nancial statements. Material accounting policies adopted in the preparation of these fi nancial statements are presented below and have been applied consistently unless stated otherwise. Except for cash fl ow information, the fi nancial statements have been prepared on an accruals basis and are based on historical costs, modifi ed, where applicable, by the measurement at fair value of selected non-current assets, fi nancial assets and fi nancial liabilities. Compliance with IFRS Australian Accounting Standards incorporate International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board. Compliance with Australian Accounting Standards ensures that the fi nancial statements and notes also comply with IFRSs. (c) Principles of consolidation The consolidated fi nancial statements comprise the fi nancial statements of the Company and its subsidiaries as at 30 June each year. Subsidiaries are entities over which the Consolidated Group has the power to govern the fi nancial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. Potential voting rights that are currently exercisable or convertible are considered when assessing control. Consolidated fi nancial statements include all subsidiaries from the date that control commences until the date that control ceases. The fi nancial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. All inter-company balances and transactions, including unrealised profi ts arising from intra-group transactions have been eliminated. Unrealised losses are also eliminated unless costs cannot be recovered. Investments in subsidiaries are accounted for at cost in the individual fi nancial statements of the parent entity, including the value of options issued by the Company on behalf of its subsidiaries in relation to employee remuneration. (d) Business combinations The purchase method of accounting is used to account for all business combinations. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Acquisition costs including advisory, legal, accounting, valuation and other professional consulting fees directly attributable to the acquisition are expensed. Where equity instruments are issued, the value of the equity instruments is their published market price on the date of exchange unless, in rare circumstances, it can be demonstrated that the published price on the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifi able assets acquired and liabilities and contingent liabilities assumed in business combinations are initially measured at their fair values at acquisition date. The excess of the cost of acquisition over the fair value of the Consolidated Group’s share of the identifi able net assets acquired is recorded as goodwill (refer Note 1(g)(i)). If the cost of acquisition is less than the Consolidated Group’s share of the fair value of the net assets acquired, the difference is recognised in the Statement of Comprehensive Income, but only after a reassessment of the identifi cation and measurement of the net assets acquired. If the initial accounting for a business combination is incomplete by the time of reporting the period in which the business combination occurred, preliminary estimates are used for items for which accounting is incomplete. These provisional estimates are adjusted in a measurement period that is not to exceed 12 months from the date of acquisition to refl ect new information about facts and circumstances that existed at the date of acquisition that had they been known would have affected the amounts recognised at that date. Where settlement of any part of the cash consideration is deferred, the amounts payable in the future are discounted to the present value at the date of the exchange using the entity’s incremental borrowing rate as the discount rate. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 25 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (e) Income tax (i) Income tax expense The income tax expense for the period is the tax payable on the current period’s taxable income based on the Australian income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. (ii) Deferred tax Deferred tax assets and liabilities are recognised for all temporary differences between the carrying amounts of assets and liabilities for fi nancial reporting purposes and their respective tax bases, at the tax rates expected to apply when the assets are recovered or liabilities settled, based on those rates which are enacted or substantially enacted. Deferred tax assets are only recognised for deductible temporary differences and unused tax losses if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amounts and tax bases of investments in subsidiaries where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax balances relating to amounts recognised directly in equity are also recognised directly in equity. (iii) Tax consolidation The Company and its wholly-owned Australian resident entities are members of a tax consolidated group under Australian taxation law. The Company is the head entity in the tax consolidated group. Entities within the tax consolidated group have entered into a tax funding agreement and a tax-sharing agreement with the head entity. Under the terms of the tax funding arrangement, the Company and each of the entities in the tax consolidated group have agreed to pay a tax equivalent payment to or from the head entity, based on current tax liability or current tax asset of the head entity. (iv) Investment allowances Companies within the group may be entitled to claim special tax deductions for investments in qualifying assets (investment allowances). The Consolidated Group accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits. (f) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation on assets is calculated on a straight-line basis over the estimated useful life of the asset as follows: Class of Fixed Asset Plant and equipment Software Motor vehicles under operating lease Depreciation Rate 20% – 40% 20% – 33% 25% – 33% The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at the end of the reporting period. Motor vehicles no longer held under an operating lease are classifi ed as inventory. (g) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of the business combination over the Consolidated Group’s share of the net fair value of the identifi able assets, liabilities and contingent liabilities. Goodwill is not amortised but is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired (refer Note 15(c)). Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Any impairment is recognised immediately in the Statement of Comprehensive Income and cannot be subsequently reversed. (ii) Capitalised software development costs Software development costs are recognised when it is probable that future economic benefi ts attributable to the software will fl ow to the entity and the cost of the development can be measured reliably. Capitalised software development costs are amortised on a straight line basis over three to fi ve years, during which the benefi ts are expected to be realised. Capitalised software development costs are reviewed annually for indicators of impairment, and if indicators are identifi ed an impairment test is performed (refer Note 1(h)). 26 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (iii) Contract rights Contract rights acquired and amounts paid for contract rights are recognised at the value of any consideration paid plus any expenditure directly attributable to the transactions. Contracts are amortised over the life of the contract, and reviewed annually for indicators of impairment in line with the Consolidated Group’s impairment policy (refer Note 1(h)). (iv) Intangible assets acquired in a business combination Any potential intangible assets acquired in a business combination are identifi ed and recognised separately from goodwill where they satisfy the defi nition of an intangible asset and their fair value can be measured reliably. (h) Impairment of assets At each reporting date, the Consolidated Group reviews the carrying amounts of its tangible (including operating lease assets) and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset being the higher of the asset’s fair value less costs to sell and value in use is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash fl ows that are independent from other assets, the Consolidated Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Goodwill is tested for impairment annually and whenever there is an indication that the asset may be impaired. An impairment of goodwill is not subsequently reversed. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount rate that refl ects current market assessments of the time value of money and the risks specifi c to the asset for which the estimates of future cash fl ows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in the Statement of Comprehensive Income immediately, unless the relevant asset is carried at fair value, in which case the impairment loss is treated as a revaluation decrease, except where it exceeds a previous revaluation increment, in which case it is recognised in the profi t or loss. Where an impairment loss, other than one relating to goodwill, subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profi t or loss immediately, unless the relevant asset is carried at fair value, in which case the reversal of the impairment loss is treated as a revaluation increase. Operating lease assets are reviewed for impairment on an ongoing basis and at reporting date using both internal and external sources of information. (i) Financial instruments Recognition and de-recognition Regular purchases and sales of fi nancial assets and liabilities are recognised on trade date, the date on which the Consolidated Group commits to the fi nancial assets or liabilities. Financial assets are derecognised when the rights to receive cash fl ows from the fi nancial assets have expired or have been transferred and the Consolidated Group has transferred substantially all the risks and rewards of ownership. (i) Cash and cash equivalents For statement of cash fl ow purposes, cash and cash equivalents includes cash on hand, deposits held at call with fi nancial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash which are subject to an insignifi cant risk of changes in value. (ii) Trade and other receivables All receivables are classifi ed as ‘loans and receivables’ under the requirements of AASB 139 Financial Instruments: Recognition and Measurement and are recognised initially at fair value, and subsequently at amortised cost, less provision for impairment. All trade and other receivables are classifi ed as current as they are due for settlement within the agreed credit terms of settlement which are usually no more than 30 days from the date of recognition. Cash fl ows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The Directors establish an allowance for impairment when there is objective evidence that the Consolidated Group will not be able to collect all amounts due according to the original terms of the receivables. The provision consists of allowances for specifi c doubtful amounts. The allowance account for receivables is used to record impairment losses unless the Consolidated Group is satisfi ed that there is no possible recovery of the amount, at which point it is written off directly against the amount owing. The impairment loss and any subsequent reversal thereof, is recognised in the Statement of Comprehensive Income within other expenses. There have been no amounts recorded for impairment for the parent entity. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 27 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (iii) Other fi nancial assets Investments in subsidiaries Investments in subsidiaries are carried at cost and adjusted for any share based payments in the separate fi nancial statements of the Company, under AASB 127: Consolidated and Separate Financial Statements. (iv) Other fi nancial liabilities Trade and other payables Trade and other payables, including accruals, are recorded initially at fair value, and subsequently at amortised cost. Trade and other payables are non-interest bearing. (j) Employee benefi ts (i) Wages and salaries, annual leave and long service leave Provision is made for the Consolidated Group’s liability for employee benefits arising from services rendered by employees to reporting date. Employee benefits expected to be settled within one year together with benefits arising from wages and salaries and annual leave which will be settled after one year, have been measured at amounts expected to be paid when the liability is settled plus related on-costs. Other employee benefits payable later than one year have been measured at the present value of the estimated future cash outfl ows to be made for those benefits. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using interest rates attaching to national government guaranteed securities with terms to maturity that match, as closely as possible, the estimated future cash outfl ows. (ii) Superannuation The amount charged to the Statement of Comprehensive Income in respect of superannuation represents the contributions made by the Consolidated Group to superannuation funds. (iii) Bonuses A liability for employee benefits in the form of bonuses is recognised in employee benefits. This liability is based upon pre-determined plans tailored for each participating employee and is measured on an ongoing basis during the fi nancial period. The amount of bonuses is dependent on the outcomes for each participating employee. An additional amount is included where the Board has decided to pay discretionary bonuses for exceptional performance. (k) Revenue Revenue is recognised at the fair value of consideration received or receivable. Amounts disclosed as revenue are shown net of returns, trade allowances and duties, amortisation of pre-paid fee discounts included in deferred contract establishment costs, and taxes paid. The following specific criteria must also be met before revenue is recognised: (i) Rendering of services Revenue from services provided is recognised when the service is provided to the customer. (ii) Interest Revenue from interest is recognised as interest accrues using the effective interest rate method. The effective interest rate method uses the rate that exactly discounts the estimated future cash flows over the expected life of the fi nancial asset. (iii) Dividends Revenue from dividends is recognised when the Consolidated Group’s right to receive payment is established. (iv) Lease revenue (property, plant and equipment) Operating lease revenue is made up of operating lease interest and revenue from the principal that forms the net investment in the leased asset. Interest included in operating lease instalments is calculated on a straight-line basis for each customer contract based on the effective rate method using the interest rate in the lease contract, the net investment value of the leased asset and the residual value. The principal portion upon receipt reduces the net investment in the leased asset. 28 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (v) Sale of leased assets Revenue includes the proceeds from the routine sale of motor vehicles previously leased and included within property, plant and equipment following the cessation of the rental of these assets by a customer. (vi) Vehicle maintenance services Revenues from maintenance service contracts are recognised for services rendered when it is probable that economic benefi ts from the transaction will fl ow to the Consolidated Group. When the amounts are uncollectable or recovery is not considered probable, an expense is recognised immediately. Revenue is recognised for each reporting period by reference to the stage of completion when the outcome of the service contracts can be estimated reliably. The stage of completion of service contracts is based on the proportion that costs incurred to date bear to total estimated costs. When the outcome cannot be measured reliably, revenue is deferred and recognised 60 days after the contract terminates. (l) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Taxation Offi ce (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of expense. Receivables and payables in the Statement of Financial Position are shown inclusive of GST. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the Statement of Financial Position. (m) Leasing Leases are classified as fi nance leases whenever the terms of the contract transfers substantially all the risk and rewards of ownership to the lessee. All other contracts are classified as operating leases. (i) Finance lease receivable portfolio Lease contracts with customers are recognised as fi nance lease receivables at the Consolidated Group’s net investment in the lease which equals the net present value of the future minimum lease payments. Finance lease income is recognised as income in the period to refl ect a constant periodic rate of return on the Consolidated Group’s remaining net investment in respect of the lease. (ii) Operating lease portfolio – the Group as lessor Lease contracts with customers other than fi nance leases are recognised as operating leases. The Consolidated Group’s initial investment in the lease is added as a cost to the carrying value of the leased assets and recognised as lease income on a straight line basis over the term of the lease. Operating lease assets are amortised as an expense on a straight line over the term of the lease based on the cost less residual value of the lease. (n) Share-based payments The fair values of options granted are recognised as an employee benefit expense with a corresponding increase in equity (share option reserve). The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. Fair value is determined using a binomial option pricing model. In determining fair value, no account is taken of any performance conditions other than those related to the share price of the Company (“market conditions”). The cumulative expense recognised between grant date and vesting date is adjusted to refl ect the Directors’ best estimate of the number of options that will ultimately vest because of internal conditions attached to the options, such as the employees having to remain with the Consolidated Group until vesting date, or such that employees are required to meet internal targets. No expense is recognised for options that do not ultimately vest because internal conditions were not met. An expense is still recognised for options that do not ultimately vest because a market condition was not met. (o) Issued capital Ordinary shares and premium received on issue of options are classifi ed as issued capital within equity. Costs directly attributable to the issue of new shares or options are shown as a deduction from the equity proceeds, net of any income tax benefit. Costs directly attributable to the issue of new shares or options associated with the acquisition of a business are included as part of the business combination. (p) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the Consolidated Group, on or before the end of the fi nancial year but not distributed at balance date. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 29 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (q) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to members of the Company by the weighted average number of ordinary shares outstanding during the fi nancial year, adjusted for bonus elements in ordinary shares during the year. Diluted earnings per share Earnings and the weighted average number of shares used in calculating basic earnings per share is adjusted for the following to calculate diluted earnings per share: • • the after-tax effect of interest and any other fi nancing costs associated with dilutive potential ordinary shares; and the weighted average number of additional shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (r) Segment reporting Operating segments are reported in a manner consistent with internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing the performance of the operating segments, has been identifi ed as the Chief Executive Offi cer. (s) Provisions Provisions are recognised when the Consolidated Group has a present obligation (legal or constructive) as a result of a past event and where it is probable that the Consolidated Group is required to settle the obligation, and the obligation can be reliably estimated. Restructurings A restructuring provision is recognised when the Consolidated Group has developed a plan for the restructuring and has communicated with those affected that it will carry out the plan. The provision is measured based on the direct cost arising from and necessary to undertake the restructuring plan and not with the ongoing activities of the Group. (t) Inventories The inventory of motor vehicles is stated at the lower of cost and net realisable value. Following termination of the lease or rental contract the relevant assets are transferred from Assets under Operating Lease to Inventories at their carrying amount. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs to make the sale. (u) Operating cash fl ow All cash fl ows other than investing or fi nancing cash fl ows are classified as operating cash fl ows. As the asset management segment provides operating and fi nance leases for motor vehicles and equipment, the cash outfl ows to acquire the lease assets are classified as operating cash outfl ows. Similarly, interest received and interest paid in respect of the asset management segment are classified as operating cash fl ows. (v) Borrowings Borrowings are initially recorded at fair value, net of transaction costs and subsequently measured at amortised cost using the effective interest rate method. The effective interest rate method exactly discounts the estimated cash flows through the expected life of the borrowing. (w) Derivative fi nancial instruments The Consolidated Group uses derivative fi nancial instruments to manage its interest rate exposure to interest rate volatility and its impact on leasing product margins. The process to mitigate against the exposure seeks to have more control in balancing the spread between interest rates charged to lease contracts and interest rates and the level of borrowings assumed in its fi nancing as required. In accordance with the Consolidated Group’s treasury policy, derivative interest rate products that can be entered into include interest rate swaps, forward rate agreements and options as cash fl ow hedges to mitigate both current and future interest rate volatility that may arise from changes in the fair value of its borrowings. Derivative fi nancial instruments are recognised at fair value at the date of inception and subsequently remeasured at fair value at reporting date. The resulting gain or loss is recognised in profi t or loss unless the derivative or amount thereof is designated and effective as a hedging instrument, in which case the gain or loss is taken to equity and subsequently recognised in the Statement of Comprehensive Income to match the timing and relationship with the amount that the instrument was intended to hedge. 30 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (x) Foreign currency translation The consolidated fi nancial statements of the Consolidated Group are presented in Australian dollars which is the functional and presentation currency. The fi nancial results and affairs of foreign operations are translated into the presentation currency using the closing rate method where assets and liabilities are translated at prevailing rates at reporting date and the results for the period at exchange rates at the date of the transactions. Exchange differences arising from the translation at reporting date are recognised in other comprehensive income and accumulated in equity. (y) Critical judgements and signifi cant accounting estimates The preparation of fi nancial statements requires the Board to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. All signifi cant judgements, estimates and assumptions made during the year have been considered for signifi cance. Key assumptions used for value-in-use calculations to determine the recoverable amount of assets in impairment tests are discussed in Note 15(d). Estimates of signifi cance are used in determining the residual values of operating lease and rental assets at the end of the contract date and income from maintenance services, which is recognised on a percentage stage of completion. In determining residual values, critical judgements include the future value of the asset lease portfolio at the time of sale, economic and vehicle market conditions and dynamics. For income from maintenance contracts, judgement is made in relation to expected realisable margins. The estimates and underlying assumptions are reviewed on an ongoing basis. No other judgements, estimates or assumptions are considered signifi cant. (z) New accounting standards and interpretations None of the new standards and amendments to standards and interpretations that are mandatory for the fi rst time for the fi nancial year beginning 1 July 2011 affected any of the amounts recognised in the current period or any prior period and are not likely to affect future periods. The following new accounting standards, amendments to standards and interpretations (Standards) have been issued and are effective for annual reporting periods beginning after 30 June 2012, but have not been applied in preparing this fi nancial report. None of these are expected to have a signifi cant effect on the fi nancial report of the Consolidated Group unless otherwise noted in the Standards below. The Consolidated Group has not or does not plan to adopt these Standards early and the extent of their impact has not been fully determined. (i) AASB 9 Financial Instruments (effective for annual reporting periods on or after 1 January 2015) AASB 9 aims to replace AASB 139 Financial Instruments: Recognition and Measurement in its entirety. To date, the chapters dealing with recognition, classifi cation, measurement and de-recognition of fi nancial assets and liabilities have been issued. (ii) AASB 10 Consolidation (effective for annual reporting periods on or after 1 January 2013) AASB 10 replaces all previous guidance on control and consolidation in AASB 127 ‘Consolidated and Separate Financial Statements’. It revises the defi nition of control and therefore, affects whether an investee is consolidated. (iii) AASB 11 Joint Arrangements (effective for annual reporting periods on or after 1 January 2013) This Standard replaces AASB 131 ‘Interests in Joint Ventures’ and introduces a principles based approach to accounting for joint arrangements. The emphasis is no longer on the legal structure of the joint arrangement, but rather on how rights and obligations are shared by parties under the contractual agreement and then account for those rights and obligations in accordance with the type of joint arrangement entered into being either joint operation or joint venture. (iv) AASB 12 Disclosure of Interest in Other Entities (effective for annual reporting periods on or after 1 January 2013) AASB 12 integrates the disclosure requirements for various types of investments, including unconsolidated structured entities. It introduces new disclosure requirements about the risks to which an entity is exposed from its involvement with structured entities. (v) AASB 13 Fair Value Measurement (effective for annual reporting periods on or after 1 January 2013) AASB 13 does not affect which items are required to be fair-valued, but clarifi es the defi nition of fair value. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 31 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (vi) AASB 119 Employee Benefi ts (effective for annual reporting periods on or after 1 January 2013) Changes to AASB 119 relate to defi ned benefi t plans and as the Group has no defi ned benefi t plans amendments to this Standard is not expected to have any impact on the Consolidated Group’s fi nancial report. (vii) AASB 124 Related Party Disclosure (effective for annual reporting periods on or after 1 July 2013) AASB 124 clarifi es the defi nition of related party and specifi cally requires the disclosure of commitments involving related parties. The Standard also introduces a partial exemption from the disclosure requirements for government-related entities which is not applicable to the Consolidated Group. (viii) AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements (effective for annual reporting periods on or after 1 January 2013) AASB 2011-4 make amendments to AASB 124 “Related Party Disclosures” to remove individual key management personnel disclosure requirements to achieve consistency with the international equivalent and remove duplication with the Corporations Act 2011. (ix) AASB 127 Separate Financial Statements (2011) (effective for annual reporting periods on or after 1 January 2013) This Standard deals with the requirements of separate fi nancial statements, which have been carried over largely unchanged from AASB 127 ‘Consolidated and Separate Financial Statements’. (x) AASB 128 Investments in Associates and Joint Ventures (2011) (effective for annual reporting periods on or after 1 January 2013) This Standard supersedes AASB 128 ‘Investments in Associates’ and prescribes the accounting for investments in associates. (xi) AASB 101 Presentation of Financial Reports and AASB 2011-7 “Amendments to Australian Accounting Standards – Presentation of Items of Other Comprehensive Income” (effective for annual reporting periods on or after 1 July 2012) The amendment to this Standard requires additional disclosure in the other comprehensive income section of items that will be or will not be re-classifi ed to profi t or loss including separate disclosure of associated tax. (xii) Interpretation 20 Stripping Costs (effective for annual reporting periods on or after 1 January 2013) As the Consolidated Group does not incur any production stripping costs this interpretation is not expected to have any impact on the Consolidated Group’s fi nancial report. (aa) Changes in accounting policies In the current year, the Consolidated Group has adopted all of the new and revised Standards and Interpretations issues by the Australian Accounting Standards Board that are relevant to its operations and effective for the current annual reporting period. There have been no signifi cant effects on current, prior or future periods arising from the first time application of the standards in respect of presentation, recognition and measurement in the current year fi nancial statements. (ab) Parent entity accounts In accordance with Class order CO10/654 the Consolidated Group will continue to include parent entity financial statements in the fi nancial report. (ac) Rounding of amounts The Company is of a kind referred to in Class order CO98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the fi nancial report. Amounts in the fi nancial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. 32 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 2 FINANCIAL RISK MANAGEMENT The Consolidated Group’s overall risk management approach is to identify the risks and implement safeguards which seek to profi t from and minimise potential adverse effects on the fi nancial performance of the Group. The Board is responsible for monitoring and managing the fi nancial risks of the Consolidated Group. The Board monitors these risks through monthly board meetings, via regular reports from the Risk and Compliance Committee and ad hoc discussions with senior management, should the need arise. A risk register is presented to the Board at least quarterly and Credit and Treasury reports are provided to the Interest Committee and Credit Committee respectively, by the Group Treasurer and Credit Manager, including sensitivity analysis in the case of interest rate risk and ageing / exposure reports for credit risk. These committee reports are discussed at Board meetings monthly, along with management accounts. All exposures to risk and management strategies are consistent with prior year, other than as noted below. (a) Liquidity risk Liquidity risk is the risk that the Consolidated Group will not be able to meet its fi nancial obligations as they fall due. Liquidity management strategy The Asset Management business and the resultant borrowings exposes the Consolidated Group to potential mismatches between the refi nancing of its assets and liabilities. The Consolidated Group’s objective is to maintain continuity and fl exibility of funding through the use of committed revolving bank facilities, asset subordination and surplus cash as appropriate to match asset and liability requirements. The Consolidated Group’s policy is to ensure that there is suffi cient liquidity through access to committed available funds to meet at least twelve months of average net asset funding requirements. This level is expected to cover any short term fi nancial market constraint for funds. The Consolidated Group monitors monthly positive operating cash fl ows and forecasts cash fl ows for each twelve month period. Signifi cant cash deposits have been maintained which enable the Consolidated Group to settle obligations as they fall due without the need for short term fi nancing facilities. The Chief Financial Offi cer and the Group Treasurer monitor the cash position of the Consolidated Group daily. Financing arrangements During the year the Consolidated Group re-negotiated its borrowing arrangements for Interleasing (Australia) Limited to extend the original facility by a further year to 31 March 2015 on improved terms. The Consolidated Group’s total borrowing facilities at reporting date was $180m of which $24m was undrawn. Subsequent to balance date (refer Note 29) the Consolidated Group increased its aggregate facilities by a further $90m. The level and type of funding will be reviewed on an on-going basis to ensure they meet the Group’s on-going requirements. The facilities at reporting date may be drawn at any time. Details of each facility are as follows: Facility A: This amortising facility was fully repaid ahead of schedule during the year (2011 balance $17m). Facility C: The $180m revolving facility that is drawn to $156m at reporting date expires on 31 March 2015 (2011: $130m revolving facility that could be stepped up by $20m to $150m on 1 July 2011 and by $50m to $180m on 1 October 2011). Maturities of fi nancial liabilities The table below analyses the Consolidated Group’s and the parent entity’s fi nancial liabilities into relevant maturity groupings based on their contractual maturities and based on the remaining period to the expected settlement date. The amounts disclosed in the table are the contractual undiscounted cash fl ows. Balances due within 12 months equal their carrying value as the impact of discounting is not signifi cant. Consolidated Group – at 30 June 2012: Contractual maturities of fi nancial liabilities Less than 6 mths 6-12 mths 1-2 years 2-5 years Over 5 years Total contractual cash fl ows Carrying Amount (assets)/liabilities Trade payables Borrowings $’000 57,771 3,235 61,006 $’000 - 2,973 2,973 $’000 - 5,759 5,759 $’000 - 160,212 160,212 $’000 - - - $’000 57,771 172,179 229,950 $’000 57,771 155,811 213,582 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 33 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Consolidated Group – at 30 June 2011: Contractual maturities of fi nancial liabilities Less than 6 mths 6-12 mths 1-2 years 2-5 years Over 5 years Total contractual cash fl ows Carrying Amount (assets)/liabilities Trade payables Borrowings $’000 45,285 4,644 49,929 $’000 - 7,593 7,593 $’000 - 22,620 22,620 $’000 - 118,905 118,905 $’000 - - - $’000 45,285 153,762 199,047 $’000 45,285 129,488 174,773 Parent – at 30 June 2012: Contractual maturities of fi nancial liabilities Less than 6 mths 6-12 mths 1-2 years 2-5 years Over 5 years $’000 46,816 3,235 - 50,051 $’000 - 2,973 - 2,973 $’000 - 5,759 - 5,759 $’000 - 160,212 - 160,212 $’000 - - - - Total contractual cash fl ows Carrying Amount (assets)/liabilities $’000 46,816 $’000 46,129 172,179 - - - 218,995 46,129 Trade payables Financial guarantee contracts Borrowings Parent – at 30 June 2011: Contractual maturities of fi nancial liabilities Less than 6 mths 6-12 mths 1-2 years 2-5 years Over 5 years Total contractual cash fl ows Carrying Amount (assets)/liabilities $’000 30,990 3,966 678 35,634 $’000 - 3,923 3,670 7,593 $’000 - 7,867 14,753 22,620 $’000 - 118,905 - 118,905 $’000 - - - - $’000 30,990 134,661 19,101 184,752 $’000 30,990 - 16,866 47,856 Trade payables Financial guarantee contracts Borrowings (b) Credit risk Credit risk is the risk of financial loss to the Consolidated Group if a customer or counter-party to a financial instrument fails to meet its contractual obligations. The Company and Consolidated Group have exposure to credit risk through the receivables’ balances, customer leasing commitments and deposits with banks. Credit risk for the Consolidated Group arising from total receivables is $34,475,000 (2011: $21,979,000) and $54,416,000 (2011: $15,031,000) arising from total deposits with banks. Credit risk for the parent entity arising from total receivables is $72,000 (2011: $342,000) and $7,319,000 (2011: $506,000) arising from total deposits with banks. The Asset Management business has exposure to credit risk from assets leased to corporate customers, mainly from finance lease receivables of $15,561,000 (2011: $7,948,000) and the amortisation of operating lease vehicles of $244,023,000 (2011: $210,661,000) that have yet to be invoiced as future lease rentals. Such assets are secured against underlying assets. Credit risk management strategy Credit risk arises from cash and cash equivalents and deposits with banks as well as exposure from outstanding receivables and unbilled rentals for leased vehicles. For deposits with banks, only independently rated institutions with upper investment-grade ratings are used. Credit risk relating to the leasing of assets is managed pursuant to the Board approved Credit Policy by the Group CFO and the Group Treasurer and Credit Manager. The policy is reviewed annually and prescribes minimum criteria in the credit assessment process that includes credit risk of the customer, concentration risk parameters, type and intended use of the asset under lease and the value of the exposure. A two tiered Credit Committee structure is in place to stratify credit applications for assessment; a Local Credit Committee and an Executive Credit Committee reviewing applications based on volume and value of the application. All minutes of Credit Committee meetings are reported to the Board. Additionally, the Board and the Credit Committee meet periodically to review and set concentration limits to effectively spread the risks as widely as possible across asset classes, client base, industries and asset manufacturer. There are no signifi cant concentrations of credit risk through the Consolidated Group’s exposure to individual customers, industry sectors, asset manufacturers or regions. 34 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Where customers are independently rated, these ratings are taken into account. If there is no independent offi cial rating, management assesses the credit quality of the customer, taking into account information from independent national credit bureau, its financial position, business segment, past experience and other factors using an application scorecard or other risk-assessment tools. The overall debtor ageing position is reviewed monthly by the Board, as is the provision for any impairment in the trade receivables balance. (c) Market risk (i) Interest rate risk The Consolidated Group’s strong cash fl ow from operations and borrowings exposes the Consolidated Group to movements in interest rates where movements could directly affect the margins from existing contracts and the pricing of new contracts for assets leased and income earned from surplus cash. Exposure to interest rate volatility is managed via the Consolidated Group’s Treasury and pricing policies. The policies aim to minimise mismatches between the amortised value of lease contracts and the sources of financing to mitigate repricing and basis risk. Mismatch and funding graphs including sensitivity analysis, are reported monthly to the Board along with the minutes of the monthly Interest Committee meetings. Interest rate risk arises where movements in interest rates affect the net margins on existing contracts for assets leased. As the Consolidated Group carries signifi cant cash and borrowings, movements in interest rates can affect net income to the Consolidated Group, particularly for the Consolidated Group Remuneration services segment. Borrowings issued at variable rates expose the Consolidated Group to repricing interest rate risk. As at the end of the reporting period, the Consolidated Group had $156,000,000 (2011: $113,000,000) variable rate borrowings under long-term revolving facilities attributable to the Asset Management business and no borrowings (2011: $17,000,000) for other Consolidated Group requirements. The weighted average interest rate was 5.07% (2011: 5.06%) for the $156,000,000 (2011: $113,000,000) which is used as an input to asset repricing decisions. An analysis of maturities is provided in note 2(a). To mitigate the cash fl ow volatility arising from interest rate movements, the Group has entered into interest rate swaps, to exchange, at specifi ed periods, the difference between fi xed and variable rate interest amounts calculated on contracted notional principal amounts. The contracts require settlement of net interest receivable or payable on a quarterly basis. These swaps are designated to hedge underlying borrowing obligations and match the interest-repricing profi le of the lease portfolio in order to preserve the contracted net interest margin. At 30 June 2012, the Consolidated Group’s borrowings for the Asset Management business of $156,000,000 (2011: $113,000,000) were covered by interest rate swaps at a fi xed rate of interest of 5.58% (2011: 5.25%). The Consolidated Group’s interest rate risk also arises from cash at bank and deposits, which are at floating interest rates. At reporting date, the Consolidated Group had the following variable rate fi nancial assets and liabilities outstanding: Cash and deposits Bank loans (Group other) Bank loans (Asset Management segment) Interest rate swaps (notional amounts) Net exposure to cash fl ow interest rate risk 30 June 2012 Consolidated Group 30 June 2011 Parent Entity Weighted average interest rate Balance $’000 Weighted average interest rate 5.05% - 5.07% 5.58% 54,420 - (156,000) 187,000 85,420 4.19% 5.06% 5.06% 5.25% Balance $’000 15,034 (17,000) (113,000) 123,000 8,034 Of the $187,000,000 of swaps contracted at reporting date, $39,000,000 are effective post balance date and designated as hedges against forecast future borrowings. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 35 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Sensitivity analysis – floating interest rates: At 30 June 2012, the Consolidated Group’s and parent entity’s cash and cash equivalents give rise to credit and interest rate risk. If the Australian interest rate weakened or strengthened by 100 basis points, being the Consolidated Group’s view of possible fl uctuation, and all other variables were held constant, the Consolidated Group’s post-tax profit for the year would have been $597,940 (2011: $56,238) higher or lower and the parent entity $51,233 (2011: $115,458) higher or lower, depending on which way the interest rates moved based on the cash and cash equivalents and borrowings balances at reporting date. (ii) Foreign currency risk The Consolidated Group’s transactions are pre-dominantly denominated in Australian dollars which is the functional and presentation currency. (iii) Other market price risk The Consolidated Group does not engage in any transactions that give rise to any other market risks. (d) Asset risk The Consolidated Group’s exposure to asset risk is mainly from the residual value of assets under lease and the maintenance and tyre obligations to meet claims for these services sold to customers. Residual value is an estimate of the value of an asset at the end of the lease. This estimate, which is formed at the inception of the lease and any subsequent impairment, exposes the Consolidated Group to potential loss from resale if the market price is lower than the value as recorded in the books. The risk relating to maintenance and tyre services arises where the costs to meet customer claims over the contracted period exceed estimates made at inception. The Consolidated Group continuously reviews the portfolio’s residual values via a Residual Value Committee comprising experienced senior staff with a balance of disciplines and responsibilities, who measure and report all matters of risk that could potentially affect residual values and maintenance costs and matters that can mitigate the Consolidated Group from these exposures. The asset risk policy sets out a framework to measure and factor into their assessment such critical variables as used car market dynamics, economic conditions, government policies, the credit market and the condition of assets under lease. At reporting date, the portfolio of motor vehicles under operating lease of $244,023,000 (2011: $210,661,000) included a residual value provision of $1,907,000 (2011: $1,303,000). (e) Fair value measurements The fair value of fi nancial assets and fi nancial liabilities is estimated for recognition and measurement for disclosure purposes. The following table is an analysis of fi nancial instruments that are measured at fair value subsequent to initial recognition, grouped into three levels based on the degree to which the fair value is observable. • • Level 1: derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: derived from inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices). • Level 3: derived from inputs for the asset or liability that are not based on observable market data (unobservable inputs). 30 June 2012 Liabilities Interest rate swap contracts – cash fl ow hedge 30 June 2011 Liabilities Interest rate swap contracts – cash fl ow hedge Level 1 $’000 - - Level 2 $’000 (1,438) (306) Level 3 $’000 - - Total $’000 (1,438) (306) Refer to notes 8 to 10 for details of the fair value of assets and 16 to 19 for the fair value of liabilities. 36 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 3 REVENUE Revenue from continuing operations Remuneration services1 Lease rental services Proceeds from sale of leased assets Dividends received Interest – other persons Total revenue 1 Included in remuneration services revenue is fee income derived from the holding of trust funds 4 EXPENSES Profi t before income tax includes the following specifi c expenses (a) Finance costs Interest – fi nancial institutions Depreciation and amortisation expense and impairment Software development Contract rights acquired Assets under operating lease Plant and equipment Residual value impairment loss Rental expense on operating leases Minimum lease payments Superannuation Defi ned contribution superannuation expense 3,506 3,035 (b) Auditor’s remuneration Remuneration of the auditor (Grant Thornton Audit Pty Ltd) of the parent entity for: Audit or review of the fi nancial statements Audits for customer contracts Agreed upon procedures to review vehicle compliance and payroll systems Review of subsidiary Network fi rm of the parent entity’s auditor $ $ 167,000 26,500 45,000 - - 157,500 22,000 - 25,000 - McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 137,284 115,758 47,584 - 1,404 302,030 111,648 118,848 40,042 - 767 271,305 - - - 16,734 150 16,884 - - - 21,100 33 21,133 12,710 11,064 - - 10,385 11,278 766 1,814 967 928 66,440 2,827 604 71,766 786 964 62,558 2,716 1,037 68,061 4,296 3,670 - - - - - - - - $ - - - - - - - - - - - - - $ 5,000 - - - - 37 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 5 INCOME TAX EXPENSE/(BENEFIT) (a) Components of tax expense / (benefi t) Current tax expense / (benefi t) Adjustments for current tax of prior years Deferred tax Income tax expense / (benefi t) (b) The prima facie tax payable on profi t before income tax is reconciled to the income tax expense/(benefi t) as follows: Profi t before income tax Prima facie tax payable on profi t before income tax at 30% (2011: 30%) Add tax effect of: - share based payments - non-deductible costs - research & development - overseas tax rate differential of subsidiaries - previously recognised tax losses now unrecognised in deferred tax assets - (over) / under provision for tax from prior year 23,958 (299) (614) 23,045 77,350 23,205 403 65 (330) 1 211 (510) 23,045 Less tax effect of: - dividends received Income tax expense / (benefi t) 6 EARNINGS PER SHARE Basic earnings per share Basic EPS – cents per share Net profi t after tax Weighted average number of ordinary shares outstanding during the year used in the calculation of basic EPS Diluted earnings per share Diluted EPS – cents per share Earnings used to calculate basic earnings per share (EPS) Weighted average number of ordinary shares outstanding during the year used in the calculation of basic EPS Weighted average number of options on issue outstanding Weighted average number of ordinary shares outstanding during the year used in the calculation of diluted EPS 38 19,760 - (1,022) 18,738 (470) (2) 34 (438) (1,139) 1,183 173 217 62,198 18,659 15,250 4,575 17,881 5,364 145 17 (83) - - - - 7 - - - - 18,738 4,582 - - - - - 1,183 6,547 (6,330) 217 Consolidated Group 2012 ’000 76.6 $54,305 70,864 2011 ’000 64.0 $43,460 67,903 74.1 61.2 $54,305 $43,460 70,864 2,416 73,280 67,903 3,088 70,991 - - 23,045 18,738 (5,020) (438) NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 7 DIVIDENDS Final fully franked ordinary dividend for the year ended 30 June 2011 of $0.22 (2010: $0.14) per share franked at the tax rate of 30% (2010: 30%) Interim fully franked ordinary dividend for the year ended 30 June 2012 of $0.22 (2011: $0.16) per share franked at the tax rate of 30% (2011: 30%) Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 15,027 9,497 15,027 9,497 16,395 31,422 10,891 20,388 16,395 31,422 10,891 20,388 Franking credits available for subsequent fi nancial years based on a tax rate of 30% (2011 – 30%) 37,110 32,764 37,110 32,990 The above amounts represent the balance of the franking account at the end of the fi nancial year end adjusted for: (a) (b) (c) franking credits that will arise from the payment of the amount of the provision for income tax; franking debits that will arise from the payment of dividends recognised as a liability at the reporting date, and; franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the parent entity if distributable profi ts of subsidiaries were paid as dividends. The impact on the franking account of the dividends recommended by the Directors since year end, but not recognised as a liability at year end, will be a reduction in the franking account of $7,984,711 (2011: $6,421,829). 8 CASH AND CASH EQUIVALENTS Cash on hand Bank balances Short term deposits Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 4 9,018 45,398 54,420 3 14,119 912 15,034 - 781 6,538 7,319 - 506 - 506 Cash and cash equivalents are subject to interest rate risk as they earn interest at fl oating rates. Cash at bank is invested at fl oating rates. In 2012, the fl oating interest rates for the Consolidated Group and parent entity were between 1.50% and 5.38% (2011: 1.50% and 5.22%). The short term deposits are also subject to fl oating rates, which in 2012 were between 4.71% and 5.18% (2011: 4.96% and 5.43%). These deposits have an average maturity of 90 days (2011: 90 days). Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 9 TRADE AND OTHER RECEIVABLES Current Trade receivables Other receivables 8,627 10,287 18,914 6,444 7,587 14,031 - 72 72 The carrying amount of all current receivables are equal to their fair value as they are short term and fully recoverable. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES - 342 342 39 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (a) Ageing and impairment losses The ageing of trade receivables for the Consolidated Group at reporting date was: 2012 2011 Total Amount impaired Amount not impaired Total Amount impaired Amount not impaired $’000 8,218 93 92 273 224 8,900 $’000 - - - (54) (219) (273) $’000 8,218 93 92 219 5 8,627 $’000 6,196 178 30 114 145 6,663 $’000 - (54) (2) (23) (140) (219) $’000 6,196 124 28 91 5 6,444 Not past due Past due 30 days Past due 31-60 days Past due 61-90 days Past due >90 days Total (b) Concentration of risk The Consolidated Group’s maximum exposure to credit risk at reporting date by geographic region is predominantly in Australia based on the location of trades and economic activity. Approximately 38% (2011: 25%) of the Consolidated Group’s trade receivables relate to customers for the supply of vehicle leasing related services. Management have assessed this concentration of risk and are satisfi ed with the strategies employed in ensuring the exposure to this risk is minimal. Management considers that no other signifi cant concentrations of risk within trade receivables exist. (c) Other receivables These amounts generally arise from transactions outside the usual operating activities of the Consolidated Group. None of the other current receivables are impaired or past due. (d) Doubtful debts policy Refer Note 1(i). 10 FINANCE LEASE RECEIVABLES Current fi nance lease receivables Non-current fi nance lease receivables Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 6,043 9,518 15,561 3,748 4,200 7,948 - - - - - - As current fi nance lease receivables are short term their carrying amount is equal to their fair value. The fair value of non-current fi nance lease receivables is estimated to be $9,208,000 (2011:$4,736,004) using an 8.55% (2011:8.4%) discount rate. Amounts receivable under fi nance lease receivables Within one year Later than one but not more than fi ve years Less: unearned fi nance income Present value of minimum lease payments Consolidated Group Minimum lease payments Present value of lease payments Minimum lease payments Present value of lease payments 2012 $’000 6,656 13,686 20,342 4,781 15,561 2012 $’000 6,043 9,518 15,561 - 15,561 2011 $’000 4,198 4,792 8,990 1,075 7,948 2011 $’000 3,748 4,200 7,948 - 7,948 There were no unguaranteed residual values of assets leased under fi nance leases at reporting date (2011: nil). 40 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 11 OTHER FINANCIAL ASSETS Shares in subsidiaries at cost 12 SUBSIDIARIES Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 - - 102,230 100,863 Note 12 The consolidated fi nancial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 1(c). Name Parent entity McMillan Shakespeare Limited Subsidiaries of parent entity Maxxia Pty Limited * Remuneration Services (Qld) Pty Limited * Easilease Pty Limited Interleasing (Australia) Ltd * CARILA Pty Ltd * TVPR Pty Ltd * Maxxia Limited Maxxia Fleet Limited (incorporated on 12 October 2011) Country of Incorporation Percentage Owned 2012 Percentage Owned 2011 Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - * These subsidiaries have been granted relief from the necessity to prepare fi nancial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. For further information refer to Note 28. Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 13 PROPERTY, PLANT AND EQUIPMENT (a) Plant and equipment At cost Less accumulated depreciation Assets under operating lease At cost Less accumulated depreciation 20,161 (11,218) 8,943 369,707 (125,684) 244,023 17,069 (8,290) 8,779 279,855 (69,194) 210,661 Total plant and equipment 252,966 219,440 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES - - - - - - - - - - - - - - 41 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (b) Movements in cost and accumulated depreciation Consolidated entity Year ended 30 June 2012 Balance at the beginning of year Additions(1) Disposals / transfers to assets held for sale Impairment loss(2) Depreciation expense Balance at 30 June Year ended 30 June 2011 Balance at the beginning of year Additions (1) Disposals / transfers to assets held for sale Impairment loss Depreciation expense Balance at 30 June Plant and equipment Assets under operating lease $’000 $’000 8,779 3,147 (156) - (2,827) 8,943 7,358 4,165 (28) - (2,716) 8,779 210,661 136,802 (36,396) (604) (66,440) 244,023 202,471 104,212 (32,427) (1,037) (62,558) 210,661 Total $’000 219,440 139,949 (36,552) (604) (69,267) 252,966 209,829 108,377 (32,455) (1,037) (65,274) 219,440 (1) Included in additions of $3,147,000 (2011: $4,165,000) were reimbursements by the lessor of $1,235,000 (2011: $895,000). (2) Accumulated provision for impairment loss at reporting date is $1,907,000. (c) Security The above assets form part of the security supporting the fi xed and fl oating charge pledged to the Consolidated Group’s fi nancier. (d) Property, plant and equipment held for sale Property, plant and equipment no longer held under operating leases are classifi ed as inventory. 14 DEFERRED TAX ASSETS (a) Asset/(Liability) The balance comprises temporary differences attributable to: Amounts recognised in profi t or loss Doubtful debts Provisions Property, plant and equipment Accrued expenses Other receivables/prepayments Finance leases Other Contract rights Derivatives Closing balance at 30 June Recognised as: Deferred tax asset Deferred tax liability 42 Consolidated Group 2012 $’000 2011 $’000 Parent Entity 2012 $’000 2011 $’000 82 1,925 (7,185) 4,654 (206) 2,249 283 (550) 431 1,683 9,624 (7,941) 1,683 65 1,622 (5,955) 3,612 (699) 2,851 481 (829) 92 1,240 8,723 (7,483) 1,240 - 101 - 25 - - 34 - - 160 160 - 160 - - - 17 - - 54 - - 71 71 - 71 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Consolidated Group Parent Entity (b) Movement Opening balance at 1 July (Credited / Charged) to Statement of Comprehensive Income Charged to equity Closing balance at 30 June 15 INTANGIBLE ASSETS (a) Carrying values Goodwill Cost Impairment loss Net carrying value Software development costs Cost(i) Accumulated amortisation Net carrying value Contract rights Cost Accumulated amortisation Net carrying value Total Intangibles (i) Software includes capitalised internal costs (b) Reconciliation of net book amount 2012 Net book amount Balance beginning of year Additions Amortisation Balance end of year 2011 Net book amount Balance beginning of year Additions Amortisation Balance end of year McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 2012 $’000 1,240 104 339 1,683 33,328 (36) 33,292 12,371 (6,174) 6,197 9,472 (6,512) 2,960 42,449 Goodwill $’000 33,292 - - 33,292 33,292 - - 33,292 2011 $’000 126 1,022 92 1,240 33,328 (36) 33,292 9,001 (5,207) 3,794 7,672 (4,909) 2,763 39,849 3,794 3,370 (967) 6,197 1,886 2,694 (786) 3,794 2012 $’000 71 89 - 160 2011 $’000 1,427 (1,356) - 71 - - - - - - - - - - - - - - - - - - - - Total $’000 39,849 5,170 (2,570) 2,763 1,800 (1,603) 2,960 42,449 3,727 - (964) 2,763 38,905 2,694 (1,750) 39,849 43 Consolidated Group Software development costs $’000 Contract rights $’000 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (c) Impairment test for goodwill Goodwill is allocated to the Consolidated Group’s cash-generating units (CGUs) identifi ed arising from the acquisitions of subsidiaries. The carrying amount of goodwill allocated to each CGU: Maxxia Pty Limited Remuneration Services (Qld) Pty Limited Consolidated Group 2012 $’000 24,190 9,102 33,292 2011 $’000 24,190 9,102 33,292 The recoverable amount of each CGU above is determined based on value-in-use calculations. These calculations use the present value of cash fl ow projections based on fi nancial budgets approved by management covering a fi ve-year period. (d) Key assumptions used for value-in-use calculations Maxxia Pty Limited Remuneration Services (Qld) Pty Limited Discount rate 2012 % 17.54 17.54 2011 % 16.20 16.20 The budgets use historical average growth rates to project revenue. Costs are determined taking into account historical margins and estimated cost increases. Cash fl ows beyond the fi ve-year period are extrapolated using a zero growth rate for conservatism. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. In performing the value-in-use calculations for each CGU, the Consolidated Group has applied pre-tax discount rates to discount the forecast future attributable pre-tax cash fl ows. The equivalent pre-tax discount rates are disclosed above. The discount rates used refl ect specifi c risks relating to the relevant business each subsidiary is operating in. These assumptions have been used for the analysis of each CGU within each subsidiary. The recoverable amounts of the CGUs exceed the carrying amounts by substantial margins. Consequently, a sensitivity analysis of possible changes in key assumptions is not considered necessary. 16 TRADE AND OTHER PAYABLES Unsecured liabilities Trade payables GST payable Sundry creditors and accruals Maintenance instalments received in advance Receivables in advance Derivative fi nancial instruments Amounts payable to wholly owned entities Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 13,501 827 31,661 6,622 3,722 1,438 - 13,561 1,211 20,619 6,306 3,282 306 - 57,771 45,285 - - 440 - - - - - 508 - - - 42,051 42,491 30,482 30,990 Trade and other payables are non-interest bearing. These are short-term liabilities and the carrying value is representative of the fair value. 44 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 17 CURRENT TAX LIABILITY Income tax 18 PROVISIONS Current Employee benefi ts Non current Employee benefi ts Aggregate employee benefi ts liability 19 BORROWINGS Current Bank loans Non-current Bank loans (a) Security Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 4,323 6,752 4,323 6,752 4,830 4,023 425 5,255 448 4,471 - 2,949 155,811 126,539 - - - - - - - - 2,949 13,917 The parent entity guarantees a bank loan of a subsidiary of $156,000,000 (2011: $113,000,000). Fixed and fl oating charges are provided by the Consolidated Group in respect to fi nancing facilities. The Consolidated Group’s loans are also secured by other pledges by the Interleasing Group receiving the loans to the following fi nancial undertakings: (i) Negative pledge that imposes certain covenants including a restriction to provide other security over its assets, incurring further debt other than with the existing fi nancier, disposal of a substantial part of its business, reduction of its capital; and (ii) Financial undertakings that include the maintenance of gearing of no less than 75% and certain asset management portfolio performance indicators. (b) Fair value disclosures The fair value of fi nancial liabilities for disclosure purposes is estimated by discounting the future contractual cash fl ows at the current market interest rate that is available to the Consolidated Group for similar fi nancial instruments. The fair value of current borrowings approximates the carrying amount, as the impact of discounting is not signifi cant. (c) Risk exposures Details of the Consolidated Group’s exposure to risks arising from current and non-current borrowings are set out in Note 2. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 45 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 20 ISSUED CAPITAL (a) Share capital 74,523,965 (2011: 68,081,810) fully paid ordinary shares 56,456 25,053 56,456 25,053 (b) Reconciliation of movement in issued capital Balance at 1 July 2011 Options exercised during the year Fully paid shares issued on the exercise of employee options: - Granted in 2007 - Granted in 2008 and 2009 - Granted in 2008 and 2009 Proceeds from issue of employee options Transfer from option reserve Total shares issued Less: transaction costs Balance at 30 June 2012 Balance at 1 July 2010 Options exercised during the year Fully paid shares issued on the exercise of employee options - Granted in 2007 - Granted in 2007 Transfer from option reserve Total shares issued Balance at 30 June 2011 Number of shares 68,081,810 69,313 5,932,689 440,153 - - 6,442,155 - 74,523,965 67,677,977 95,520 308,313 - 403,833 68,081,810 Issue price $ Ordinary shares $’000 4.52 4.70 3.40 3.80 4.52 25,053 313 27,884 1,496 415 1,315 31,423 (20) 56,456 23,066 362 1,393 232 1,987 25,053 Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of members’ shares held. At members’ meetings, each fully paid ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. 46 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (c) Options At 30 June 2012, there were 3,095,233 (2011: 7,186,454) unissued ordinary shares for which options were outstanding. The Company issued the following options over ordinary shares to staff and executives in 2012. Date of issue 15 August 2011 15 August 2011 (i) 26 October 2011 14 March 2012 Options issued in 2012 (i) Options issued and fully paid at $1.32 each. Number of options Exercise price 2,002,443 314,578 352,942 31,250 2,701,213 $7.31 $7.31 $8.54 $9.29 Option expiry date 30 September 2015 30 September 2015 30 September 2015 30 September 2015 Details relating to options issued, exercised and lapsed during the year and options outstanding at the end of the reporting period is set out in Note 27 on page 55. (d) Capital management strategy The Consolidated Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefi ts for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Consolidated Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Consolidated Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as long and short term borrowings (excluding derivatives and fi nancial guarantees) less cash and cash equivalents. Total capital is calculated as equity as shown in the statement of fi nancial position plus net debt. The Consolidated Groups’ gearing ratio was 38% (2011: 50%) calculated as net debt of $101,391,000 (2011: $114,454,000) divided by total capital of $269,442,000. The parent entity’s borrowing facility included the maintenance of the Consolidated Group’s equity that was no less than $65,000,000 and the dividend payout to earnings after tax ratio to not exceed 65%. During the year the banking facility covenants of the parent entity were complied with. Following the parent entity’s repayment of the facility during the year, these borrowing covenants were no longer required at the end of the reporting period. The Consolidated Group’s Risk and Compliance Committee reviews the capital structure of the Consolidated Group on an on-going basis. As part of this review the committee considers the cost of capital and the risks associated with each class of capital. 21 RESERVES (a) Option reserve Movements in the reserve are detailed in the Statements of Changes in Equity. The reserve records amounts for the fair value of options granted and recognised as an employee benefi ts expense but not exercised. (b) Cash fl ow hedge reserve Consolidated Group Parent Entity Revaluation - gross Deferred tax Balance at 30 June 2012 2012 $’000 (1,441) 431 1,010 2011 $’000 (306) 92 (214) 2012 $’000 2011 $’000 - - - - - - McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 47 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 22 CASH FLOW INFORMATION Reconciliation of cash fl ow from operations with profi t from operating activities after income tax Profi t for the year Non cash fl ows in profi t from operating activities Amortisation Impairment loss Depreciation Option expense Net loss on disposal of plant and equipment Purchase of assets under lease Written down value of assets sold Changes in assets and liabilities, net of the effects of purchase of subsidiaries (Increase)/decrease in trade receivables and other assets Increase/(decrease) in trade payables and accruals (Decrease)/increase in income taxes payable (Decrease)/increase in deferred taxes Increase in provisions Net cash from operating activities 23 COMMITMENTS (a) Capital expenditure commitments Capital expenditure commitments contracted for: Property, plant and equipment (b) Operating lease commitments Non cancellable operating leases contracted for but not capitalised in the fi nancial statements: Payable minimum lease payments - Not later than 12 months - Between 12 months and 5 years - Greater than 5 years Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 54,305 43,460 15,688 17,664 1,603 604 70,234 1,367 - 964 1,037 66,060 482 19 (163,620) (113,181) 36,837 33,527 - - - - - - - - - - - - - - (6,632) 27,418 (2,429) (443) 784 20,028 (9,213) 14,331 (1,679) (1,114) 829 35,522 77 473 (808) (116) - 15,314 (414) (11,510) (1,679) 1,356 - 5,417 2,213 1,537 5,538 20,612 15,084 41,234 3,970 14,665 11,634 30,269 - - - - - - - - - - The property leases are non cancellable leases with varying terms, with rent payable monthly in advance. Individual rental agreements specify each rental adjustment. A new lease was entered into during the year securing offi ce premises for 10 years, with an option of a further 5 years. The equipment leases are non cancellable leases with varying terms, with rent payable quarterly in arrears. 48 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 24 SEGMENT REPORTING Reportable segments (a) Description of Segments The Consolidated Group has identifi ed its operating segments based on the internal reports reviewed and used by the Consolidated Group’s chief decision maker (the CEO) to determine business performance and resource allocation. Operating segments have been identifi ed after considering the nature of the products and services, nature of the production processes, type of customer and distribution methods. Two reportable segments have been identifi ed “Group Remuneration Services” and “Asset Management”, in accordance with AASB8 “Operating Segments” based on aggregating operating segments taking into account the nature of the business services and products sold and the associated business and fi nancial risks and how they affect the pricing and rates of return. Group Remuneration Services - This segment provides administrative services in respect of salary packaging and facilitates the settlement of motor vehicle novated leases for customers, but does not provide fi nancing. The segment also provides ancillary services associated with motor vehicle novated lease products. Asset Management - This segment provides fi nancing and ancillary management services associated with motor vehicles, commercial vehicles and equipment. (b) Segment information provided to the Chief Decision Maker The following is an analysis of the Consolidated Group’s revenue and results from operations by reportable segment. Segment revenue Segment profi t after tax Group Remuneration Services Asset Management Total for segment operations Corporate administration and directors' fees Integration costs Interest expense Interest income Tax on unallocated items 2012 $’000 137,284 163,342 300,626 2011 $’000 111,648 158,890 270,538 2012 $’000 40,265 14,268 54,533 (870) - (861) 1,404 99 2011 $’000 31,658 13,460 45,118 (831) (491) (1,814) 767 711 Profi t after tax from continuing operations for the year 54,305 43,460 (c) Other segment information (i) Segment revenue Segment revenue is reconciled to the Statement of Comprehensive Income as follows: Total segment revenue Interest revenue Total revenue per Consolidated Statement of Comprehensive Income 2012 $’000 300,626 1,404 302,030 2011 $’000 270,538 767 271,305 Segment revenue above represents sales to external customers and excludes inter-segment sales, consistent with the basis by which the fi nancial information is presented to the Chief Decision Maker. The accounting policies of the reportable segments are the same as the Consolidated Group’s policies. Segment profi t includes the segment’s share of centralised general management and operational support services which are shared across segments based on the lowest unit of measurement available to allocate shared costs that reasonably measure each segment’s service level requirements and consumption. Segment profi t does not include corporate costs of the parent entity, including listing and company fees, director’s fees and fi nance costs relating to borrowings not specifi cally sourced for segment operations or interest revenue not directly attributable to a segment. Included in the revenue for the Group Remuneration Services segment are revenues of $52,989,000 (2011: $41,319,000) from the Consolidated Group’s largest customer. The Consolidated Group’s operations and its customers are located predominantly in Australia. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 49 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (ii) Segment depreciation and amortisation Group Remuneration Services Asset Management (iii) Segment assets and liabilities 2012 $’000 4,366 67,400 71,766 2011 $’000 4,275 63,786 68,061 The segment information with respect to total assets is measured in a consistent manner with that of the fi nancial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. The parent entity’s borrowings are not considered to be segment liabilities. Segment profi ts are now reported to include income tax instead of being stated before tax as was the case in the previous year to refl ect the Chief Decision Maker’s current basis of review. Consequently, segment assets and liabilities in 2011 have been re-stated to include deferred tax asset in segment assets (2011: Group Remuneration Services $1,068,000, Asset Management $172,000) and income tax provision (2011: Group Remuneration Services $4,399,000, Asset Management $2,353,000) in segment liabilities with corresponding adjustments to unallocated assets and unallocated liabilities respectively. The reportable segments’ assets and liabilities are reconciled to total assets as follows: Segment assets Group Remuneration Services Asset Management Segment assets Non-segment assets Unallocated assets (1) Consolidated assets per statement of fi nancial position Segment liabilities Group Remuneration Services Asset Management Segment liabilities Non-segment liabilities Unallocated liabilities (2) Consolidated liabilities per statement of fi nancial position All assets and liabilities are located in Australia. 2012 $’000 2011 $’000 54,467 282,324 336,791 54,420 391,211 38,605 184,555 223,160 - 223,160 62,469 223,005 285,474 15,034 300,508 31,478 137,652 169,130 16,866 185,996 (1) (2) Unallocated assets comprise cash and bank balances of the Consolidated Group, maintained as part of the centralised treasury and funding function. Unallocated liabilities comprise parent company borrowings that are employed by the whole group. 50 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Additions to non-current assets Group Remuneration Services Asset Management 25 CONTINGENT LIABILITIES Estimates of the potential fi nancial effect of contingent liabilities that may become payable: Guarantees provided for the performance of contractual obligations. A term deposit supports the contractual guarantees. Guarantee provided for the performance of a contractual obligation not supported by term deposit. Guarantees provided in respect of property leases. 26 RELATED PARTY TRANSACTIONS (a) Wholly owned group 2012 $’000 2011 $’000 5,726 139,393 145,119 4,886 106,185 111,071 Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 - 10,643 4,275 14,918 623 20 3,953 4,596 - 50 - 50 - - 380 380 Transactions between the Company and other entities within the wholly owned group during the years ended 30 June 2012 and 2011 consisted of: (a) (b) loans advanced to the Company; and the payment of dividends to the Company. Aggregate amounts included in the determination of profi t from ordinary activities before income tax that resulted from transactions with entities in the wholly owned group: Dividend revenue Aggregate amounts payable to entities within the wholly owned group at balance date: Current payables (b) Key management personnel compensation Compensation Short-term employment benefi ts Post-employment benefi ts Long-term employment benefi ts Termination benefi ts Share-based payments Consolidated Group Parent Entity 2012 $’000 2011 $’000 2012 $’000 2011 $’000 - - $ - - $ 16,734 21,100 42,051 30,482 $ $ 3,855,127 3,294,212 1,998,301 1,926,251 287,012 43,266 - 963,608 276,549 40,476 196,923 443,096 211,543 4,843 - 682,161 192,814 24,301 196,923 282,702 5,149,013 4,251,256 2,896,848 2,622,991 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 51 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (c) Equity instrument disclosures relating to key management personnel Shareholding The number of shares in the Company held during the fi nancial year ended 30 June 2012 and 30 June 2011 by each Director and each of the Key Management Personnel of the Consolidated Group, including their personally related parties, are set out below: Year ended 30 June 2012 Non-Executive Directors R Pitcher G McMahon J Bennetts R Chessari A Podesta Executive Directors M Kay Other key management personnel G Kruyt P Lang M Salisbury M Blackburn (commenced 26 October 2011) (ii) P McCluskey (removed as KMP on 26 October 2011) (iii) A Tomas (i) (ii) (iii) Includes employee options vested during the year and sold before the exercise for shares Pre-existing balance of shares held prior to becoming KMP Balance of shares on termination as KMP Year ended 30 June 2011 Non-Executive Directors R Pitcher G McMahon J Bennetts R Chessari Executive Directors A Podesta (1) M Kay Other key management personnel M Cansdale (until 31 August 2010) G Kruyt P Lang M Salisbury P McCluskey (commenced 1 September 2010) A Tomas Balance at the start of the year Shares acquired through option exercise (i) Other changes during the year Balance held at balance date 105,100 122,000 4,568,025 6,225,063 11,235,000 - - - - - - (250,000) 105,100 122,000 4,318,025 6,225,063 11,235,000 4,164 3,750,000 (2,309,212) 1,444,952 22,259,352 3,750,000 (2,559,212) 23,450,140 119,172 6,452 - - 912 - 625,000 625,000 136,364 - - - (524,568) (625,000) (136,364) 1,250 3,000 - 219,604 6,452 - 1,250 3,912 - 126,536 1,386,364 (1,281,682) 231,218 105,100 122,000 4,718,025 6,425,063 11,235,000 4,164 22,609,352 - 370,348 101,001 - 130 - - - - - - - - - 90,000 40,000 - - - - - (150,000) (200,000) 105,100 122,000 4,568,025 6,225,063 - - 11,235,000 4,164 (350,000) 22,259,352 - (341,176) (134,549) - 782 - - 119,172 6,452 - 912 - (1) Mr Podesta resigned as an executive director with effect from 17 August 2010, but continues in the role of a non-executive director. 471,479 130,000 (474,943) 126,536 52 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Options The number of options to acquire shares in the Company held during the fi nancial year ended 30 June 2012 and 30 June 2011 by each of the other key management personnel of the Consolidated Group, including their personally related parties, are set out below. No options are held by Non-Executive Directors. Balance at the start of the year Issued Exercised or sold Lapsed Balance held at balance date Year ended 30 June 2012 M Kay M Blackburn (commenced 26 October 2011) G Kruyt P Lang M Salisbury P McCluskey (removed as KMP on 26 October 2011) A Tomas 3,750,000 720,106 (3,750,000) - 625,000 625,000 136,364 - 537,634 352,942 197,538 189,556 85,276 123,177 37,901 - (625,000) (625,000) (136,364) - - 5,673,998 1,706,496 (5,136,364) Year ended 30 June 2011 M Kay M Cansdale (until 31 August 2010) G Kruyt P Lang M Salisbury P McCluskey (commenced 1 September 2010) A Tomas 27 SHARE-BASED PAYMENTS 3,750,000 725,000 715,000 665,000 136,364 - 537,634 6,528,998 - - - - - - - - - - (90,000) (40,000) - - - - - - - - - - - - (725,000) - - - - - 720,106 352,942 197,538 189,556 85,276 123,177 575,535 2,244,130 3,750,000 - 625,000 625,000 136,364 - 537,634 (130,000) (725,000) 5,673,998 The Company issued options to certain executives and employees under the McMillan Shakespeare Limited Employee Option Plan. Two types of options have been granted under this plan, performance options and voluntary options. No executive can enter into a transaction that is designed or intended to hedge the executive’s exposure to any unvested option. Executives will be required to provide declarations to the Board on their compliance with this policy from time to time. Performance Options Performance options over unissued ordinary shares in the Company are granted for no consideration and are, other than as disclosed in this Annual Report, granted at or above market prices prevailing when the Board approved the issue. Performance options carry no dividend or voting rights. Once exercised, each option is converted into one fully paid ordinary share in the Company. The Remuneration Committee recommends to the Board the number of performance options to be granted on the basis of the position, duties and responsibilities of the relevant executive. As at 30 June 2012, the Company had made thirteen offers of performance options in March 2004, December 2004, April 2005, August 2005, February 2007, December 2007, July 2008, November 2008, August 2009 and May 2010, August 2011, October 2011 and March 2012. Many of the performance options issued have vested or expired prior to the fi nancial year ended 30 June 2012. Voluntary Options Voluntary options were fi rst granted during the year. 314,578 options were issued at $1.32 each and expire on 30 September 2015 (the consideration was set at a 25% discount to the fair value of the options on grant date) up to an investment limit of $50,000 per executive. The maximum discount to any one executive is therefore limited to $16,666. The entitlement to exercise the voluntary options is not contingent upon continued employment with the Company nor are there performance hurdles. However, if the executive leaves employment before 31 August 2014, the executive will forfeit 25% of their entitlement for $1 (the amount forfeited being equal to the 25% discount to the fair market value that applied to the acquisition price of the option at the date of the conditional offer and acceptance). The vesting date of these options is upon adoption of the Company’s 2014 Annual Report. No performance hurdles are attached to these options as the executive has paid $50,000 for the purchase of the options (representing 75% of the fair value of the options on grant date). 53 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Details for current performance and voluntary options & performance options vested in FY2012 Options & issue date Expiry Conditions 3,750,000 (July 2008) 30 June 2012 (a) Continuity of employment to 30 June 2011 (b) Achievement of predetermined targets, of which 75% was based on earnings per share (“EPS”) targets over three years, including a cumulative EPS target over the three year period in the event that the maximum EPS target was not achieved in any one year. (c) The EPS growth targets were based on the actual FY2008 EPS achieved as the base year as follows: Vested The options vested in full upon the adoption of the 2011 Annual Report. Performance Hurdles Achievement of FY2009 EPS growth of not less than 15.0% Achievement of FY2009 EPS growth of not less than 17.5% Achievement of FY2009 EPS growth of not less than 20.0% Achievement of FY2010 EPS growth of not less than 15.0% Achievement of FY2010 EPS growth of not less than 17.5% Achievement of FY2010 EPS growth of not less than 20.0% Achievement of FY2011 EPS growth of not less than 15.0% Achievement of FY2011 EPS growth of not less than 17.5% Achievement of FY2011 EPS growth of not less than 20.0% Weighting 12.50% 6.25% 6.25% 12.50% 6.25% 6.25% 12.50% 6.25% 6.25% (d) The balance (25%) was based on the undertaking by the Company of a transformational event resulting in a major diversifi cation for the Company. The transformational event is regarded as having been met through the acquisition of Interleasing (Australia) Ltd. 2,600,114 (November 2008) and 327,273 (August 2009) November 2012 and August 2013 (a) Continuity of employment. (b) Achievement of predetermined targets, of which 100% was based on EPS targets over three years, including a cumulative EPS target over three years in the event that the maximum target was not achieved in any one year. (c) The EPS growth target was based on the actual FY2008 EPS achieved as the base year as follows: Other than options in this tranche which have lapsed due to resignation, the options in this tranche vested in full upon the adoption of the 2011 Annual Report. Performance Hurdles Achievement of FY2009 EPS growth of not less than 15.0% Achievement of FY2009 EPS growth of not less than 17.5% Achievement of FY2009 EPS growth of not less than 20.0% Achievement of FY2010 EPS growth of not less than 15.0% Achievement of FY2010 EPS growth of not less than 17.5% Achievement of FY2010 EPS growth of not less than 20.0% Achievement of FY2011 EPS growth of not less than 15.0% Achievement of FY2011 EPS growth of not less than 17.5% Achievement of FY2011 EPS growth of not less than 20.0% Weighting 25.00% 5.00% 3.34% 25.00% 5.00% 3.33% 25.00% 5.00% 3.33% 537,634 (May 2010) (a) Entitlement to exercise confi rmed during the year upon the Company agreeing to a 36 month employment contract following completion of an 18 month fi xed term employment contract. (b) The entitlement is subject to continuity of employment and the achievement of predetermined NPAT targets over three years. * *The targets are established as the same targets for the options issued in August 2011 described immediately below. Entire issue vests and is exercisable (subject to the achievement of the conditions) on 1 October 2014. 1,858,829 (August 2011) and 352,942 (October 2011) and 31,250 (March 2012) The options expire four years from the relevant date of issue. The entitlement to exercise these options is subject to continuity of employment and the achievement of predetermined targets, of which 100% is based on NPAT growth targets over three years. The NPAT growth will be based on the actual NPAT achieved for the year ended 30 June 2012 (the ‘Base Year’). The NPAT growth target will be based on compounding growth targets from the Base year. The entire issue vests upon the adoption of the Company’s Annual Report for the fi nancial year ended 30 June 2014. In the event that the NPAT target in any one year is not achieved, at the end of the three year period ending 30 June 2014 the actual compound NPAT over the three year period will be calculated, and if the total exceeds the compound EPS target for the three year period, then the executives will be entitled to exercise all the options which have not been forfeited. The Board retains the right to adjust the NPAT targets in the event of a change in the capital structure of the Company that impacts earnings per share. Any change to the NPAT targets will be made having regard to the actual NPAT impact of the change to the capital structure. In the event that the executives take unpaid leave for a period exceeding three months during any of the years ending 30 June 2012, 2013 and 2014, the vesting criteria outlined above with respect to the fi nancial performance of the Company and the executives continued employment will be determined on a pro rate basis to refl ect the period of his continuous service during the relevant fi nancial year, unless the Board in its discretion determine otherwise. The performance hurdles are as follows. Performance Hurdles FY2012 NPAT growth not less than 12.5% FY2013 NPAT growth not less than 15.0% FY2014 NPAT growth not less than 15.0% Vesting portion 33.34% 33.33% 33.33% 54 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Set out below are summaries of options granted under the plans: - - - - - - - - - - - - - - Economic and parent entity - 2012 Grant date Expiry date 4 February 2007 3 February 2011 21 December 2007 20 December 2011 1 July 2008 30 June 2012 24 November 2008 23 November 2012 24 November 2008 23 November 2012 14 August 2009 13 August 2012 14 August 2009 13 August 2012 28 May 2010 1 October 2015 16 August 2011(1) 30 September 2015 16 August 2011(2) 30 September 2015 25 October 2011 30 September 2015 14 March 2012 30 September 2015 Exercise price Balance at start of the year Granted during the year Exercised or sold during the year Forfeited during the year Balance at end of the year Exercisable at end of the year $3.80 $4.52 $4.70 $3.40 $4.70 $3.40 $4.70 $3.42 $7.31 $7.31 $8.54 $9.29 - 114,688 3,750,000 306,819 1,988,750 133,334 193,939 698,924 - - - - - - - - - - - - 2,002,443 314,578 352,942 31,250 - - (69,313) (45,375) (3,750,000) (306,819) (1,988,750) (133,334) (193,939) - - - - - - - - - - - - - - - - - (161,290) 537,634 (143,614) 1,858,829 - - - 314,578 352,942 31,250 Weighted average exercise price $4.49 $7.49 $4.61 $5.16 $6.79 (1) (2) Performance options including 682,206 options granted to the Managing Director following approval by shareholders at the Annual General Meeting on 25 October 2011. Voluntary options including 37,900 options granted to the Managing Director following approval by shareholders at the Annual General Meeting on 25 October 2011. 7,186,454 2,701,213 (6,442,155) (350,279) 3,095,233 Economic and parent entity - 2011 4 February 2007 3 February 2011 21 December 2007 20 December 2011 1 July 2008 30 June 2012 24 November 2008 23 November 2012 24 November 2008 23 November 2012 14 August 2009 13 August 2012 14 August 2009 13 August 2012 28 May 2010 1 October 2015 Weighted average exercise price $3.80 $4.52 $4.70 $3.40 $4.70 $3.40 $4.70 $3.42 95,522 425,001 4,375,000 306,819 2,088,750 133,334 193,939 698,924 8,317,289 $4.50 - - - - - - - - - - (95,522) - - (308,313) (2,000) 114,688 114,688 - - - - - - (625,000) 3,750,000 - 306,819 (100,000) 1,988,750 - - - 133,334 193,939 698,924 - - - - - - (403,835) (727,000) 7,186,454 114,688 $4.35 $4.70 $4.49 $4.52 Of the forfeited options 16,875 represented expired options (2011: none). The weighted average share price at the date of exercise of options during the year ended 30 June 2012 was $4.61 (2011: $4.35). The weighted average remaining contractual life of options outstanding at the end of the year was 3.2 years (2011: 1.4 years). McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 55 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 Fair value of options granted The assessed fair value at grant date of options granted during the year (2011: none) is disclosed in the table below. The fair value at grant date is determined using a binomial option pricing model that takes into account the exercise price, the term of the option, the share price at the grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. Model input August 2011 August 2011 August 2011 October 2011 March 2012 Consideration payable upon grant Exercise price Grant date Expected life Share price at grant date Expected price volatility Expected dividend yield Risk-free interest rate Nil $7.31 $1.32 $7.31 Nil $7.31 Nil $8.54 Nil $9.29 16 August 2011 16 August 2011 16 August 2011 25 October 2011 14 March 2012 3.2 years 3.2 years 3.2 years 3.0 years 2.8 years $7.31 40% 5.3% 3.9% $7.31 40% 5.3% 3.9% $8.54 34% 4.4% 3.9% $8.54 34% 4.4% 3.9% $9.29 42% 4.1% 3.7% The expected price volatility is based on historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the year as part of employee and Director benefi ts expense were as follows: Options issued under Employee Option Plan 28 DEED OF CROSS GUARANTEE Consolidated Group Parent Entity 2012 $’000 1,367 2011 $’000 482 2012 $’000 - 2011 $’000 - McMillan Shakespeare Limited, Maxxia Pty Ltd and Remuneration Services (Qld) Pty Ltd are parties to a deed of cross guarantee entered into during the year ended 30 June 2009 and Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd (Interleasing Group) entered into deeds of cross guarantee in the year ended 30 June 2010. Under the deeds, each company guarantees the debts of the others and is relieved from the requirement to prepare a fi nancial report and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. The above companies represent a ‘Closed Group’ for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by McMillan Shakespeare Limited, they also represent the ‘Extended Closed Group’. Set out below is a statement of comprehensive income, statement of fi nancial position and a summary of movements in consolidated retained profi ts for the year ended 30 June 2012 of the Closed group consisting of McMillan Shakespeare Limited, Maxxia Pty Ltd and Remuneration Services (Qld) Pty Ltd, Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd. 56 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (a) Consolidated Statement of Comprehensive Income and summary of movements in consolidated retained profi ts Statement of Comprehensive Income Revenue and other income Employee and director benefi ts expenses Depreciation and amortisation expenses and impairment Leasing and vehicle management expenses Consulting cost expenses Marketing expenses Property and corporate expenses Technology and communication expenses Finance costs Other expenses Profi t before income tax Income tax expense Profi t attributable to members of the parent entity Other comprehensive income Other comprehensive income/(loss) for the period after tax Total comprehensive income for the period Summary of movements in consolidated retained profi ts Retained profi ts at the beginning of the fi nancial year Profi ts for the year Dividends paid Retained profi ts at the end of the fi nancial year 2012 $’000 2011 $’000 302,022 (65,676) (71,766) (50,850) (2,523) (3,004) (5,346) (7,319) 271,297 (55,336) (68,024) (52,470) (1,541) (2,671) (4,942) (5,594) (10,385) (11,278) (7,811) 77,342 (23,043) 54,299 (7,250) 62,191 (18,735) 43,456 (799) 53,500 (214) 43,242 87,902 54,299 (31,422) 110,779 64,834 43,456 (20,388) 87,902 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 57 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2012 (b) Consolidated Statement of Financial Position Current assets Cash and cash equivalents Trade and other receivables Finance lease receivables Inventory Total current assets Non current assets Property, plant and equipment Intangible assets Deferred tax asset Finance lease receivables Total non current assets TOTAL ASSETS Current liabilities Trade and other payables Current tax liability Provisions Borrowings Total current liabilities Non current liabilities Provisions Borrowings Total non current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained earnings TOTAL EQUITY 2012 $’000 54,213 22,095 6,043 1,980 84,331 252,966 42,450 1,683 9,518 306.617 390,948 57,751 4,323 4,830 - 2011 $’000 14,833 15,462 3,748 1,477 35,520 220,050 39,849 1,248 4,200 265,347 300,867 45,881 6,752 4,023 2,949 66,904 59,605 425 155,811 156,236 223,140 167,808 56,456 573 110,779 167,808 448 126,539 126,987 186,592 114,275 25,053 1,320 87,902 114,275 29 SUBSEQUENT EVENTS Subsequent to reporting date, the Group increased its Asset Management funding facility from $180m to $270m. The facility provides the company with additional liquidity and funding diversifi cation to support future growth. It has been re-priced to reduce cost and extended until August 2015. 58 DIRECTORS’ DECLARATION The Directors are of the opinion that: 1. the fi nancial statements and notes on pages 21 to 58 are in accordance with the Corporations Act 2001(Cth), including: (a) compliance with Accounting Standards, the Corporations Regulations 2001 (Cth) and other mandatory professional reporting requirements; (b) giving a true and fair view of the consolidated entity’s fi nancial position as at 30 June 2012 and fi nancial performance for the fi nancial year ended on that date; and (c) compliance with International Financial Reporting Standards as disclosed in Note 1. 2. 3. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable, and at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identifi ed in Note 28 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in the note. The Directors have been given the declarations by the Chief Executive Offi cer and Chief Financial Offi cer required by section 295A of the Corporations Act 2001 (Cth). This declaration is made in accordance with a resolution of the Directors. Ronald Pitcher, AM Chairman 6 September 2012 Melbourne, Australia Michael Kay Managing Director McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 59 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2012 60 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2012 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 61 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2012 62 AUDITOR’S INDEPENDENCE DECLARATION AS AT 30 JUNE 2012 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 63 SHAREHOLDER INFORMATION Additional information required by the ASX Listing Rules and not disclosed elsewhere in this Annual Report is set out below: SUBSTANTIAL SHAREHOLDINGS As at 31 August 2012, the number of shares held by substantial shareholders and their associates is as follows: No. Name 1. 2. J P Morgan Nominees Australia Limited National Nominees Limited 3. Meddiscope Pty Limited (1) 4. HSBC Custody Nominees (Aust) Ltd Chessari Holdings Pty Limited (2) Asia Pac Technology Pty Limited (3) 5. 6. 1 2 3 Number of Ordinary Shares Percentage of Ordinary Shares1 11,718,997 9,162,823 7,235,000 6,842,014 6,225,063 4,318,025 15.73 12.30 9.71 9.18 8.35 5.79 Meddiscope Pty Limited is a company associated with Mr Anthony Podesta, a Non-Executive Director. Meddiscope Pty Limited has a deemed relevant interest in the shares held by Cobax Pty Limited, as both entities are controlled by Mr Podesta. Chessari Holdings Pty Limited is a company associated with Mr Ross Chessari, a Non-Executive Director. Asia Pac Technology Pty Limited is a company associated with Mr John Bennetts, a Non-Executive Director. NUMBER OF SHARE & OPTION HOLDERS As at 31 August 2012, the number of holders of ordinary shares and options in the Company was as follows: Class of Security Fully paid ordinary shares Options exercisable at $3.42 and expiring on 1 October 2015 Options exercisable at $7.31 and expiring on 30 September 2015 Options exercisable at $8.54 and expiring on 30 September 2015 Options exercisable at $9.29 and expiring on 30 September 2015 Options exercisable at $11.42 and expiring on 30 September 2015 VOTING RIGHTS Number of Holders 3,213 1 20 1 1 3 In accordance with the Constitution of the Company and the Corporations Act 2001 (Cth), every member present in person or by proxy at a general meeting of the members of the Company has: • • on a vote taken by a show of hands, one vote; and on a vote taken by a poll, one vote for every fully paid ordinary share held in the Company. A poll may be demanded at a general meeting of the members of the Company in the manner permitted by the Corporations Act 2001 (Cth). DISTRIBUTION OF SHARE & OPTION HOLDERS As at 31 August 2012, the distribution of share and option holders in the Company was as follows: Distribution of Shares & Options Number of Holders of Ordinary Shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000+ 1,382 1,297 293 197 41 As at 31 August 2012 there were 48 shareholders who held less than a marketable parcel of 41 fully paid ordinary shares in the Company. 64 TOP 20 SHAREHOLDERS As at 31 August 2012, the details of the top 20 shareholders in the Company are as follows: No. Name Number of Ordinary Shares Percentage of Ordinary Shares1 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. J P Morgan Nominees Australia Limited National Nominees Limited HSBC Custody Nominees (Aust) Ltd Meddiscope Pty Limited (2) Chessari Holdings Pty Limited (3) Asia Pac Technology Pty Limited (4) BNP Paribas Noms Pty LtdAust Executor Trustees SA Ltd Citicorp Nominees Pty Limited Ann Leslie Ryan UBS Nominees Pty Ltd UBS Nominees Pty Ltd J P Morgan Nominees Australia Limited RBC Investor Services Australia Nominees Pty Ltd Citicorp Nominees Pty Limited COBAX Pty Ltd Bond Street Custodians Ltd Emily Kay Investments Pty Ltd (5) Michael Gordon Kay Investments Pty Ltd (5) Nonie Kay Investments Pty Ltd (5) Totals: Top 20 holders of issued capital Total Remaining Holders Balance 11,718,997 9,162,823 6,842,014 6,800,000 6,225,063 4,318,025 3,538,228 1,844,213 1,776,972 1,258,418 1,240,140 1,057,363 646,812 634,129 582,884 435,000 400,000 360,197 360,197 360,197 59,561,672 14,962,293 15.73 12.30 9.18 9.12 8.35 5.79 4.75 2.47 2.38 1.69 1.66 1.42 0.87 0.85 0.78 0.58 0.54 0.48 0.48 0.48 79.92 20.08 1 2 3 4 5 As at 31 August 2012, 74,523,965 fully paid ordinary shares have been issued by the Company. Meddiscope Pty Limited is a company associated with Mr Anthony Podesta, a Non-Executive Director. Meddiscope Pty Limited has a deemed relevant interest in the shares held by Cobax Pty Limited, as both entities are controlled by Mr Podesta. Chessari Holdings Pty Limited is a company associated with Mr Ross Chessari, a Non-Executive Director. Asia Pac Technology Pty Limited is a company associated with Mr John Bennetts, a Non-Executive Director. Emily Kay Investments Pty Ltd, Michael Gordon Kay Investments Pty Ltd and Nonie Kay Investments Pty Ltd are companies associated with Mr Michael Kay, an executive director. RESTRICTED SECURITIES As at the date of this Annual Report, there are no securities in the Company subject to voluntary escrow or any other restrictions. UNQUOTED SECURITIES As at the date of this Annual Report, the details of unquoted securities in the Company are as follows: Class Number of Securities Number of Holders Options exercisable at $3.42 and expiring on 1 October 2015 Options exercisable at $7.31 and expiring on 30 September 2015 Options exercisable at $8.54 and expiring on 30 September 2015 Options exercisable at $9.29 and expiring on 30 September 2015 Options exercisable at $11.42 and expiring on 30 September 2015 Options do not carry a right to vote ON-MARKET BUY BACK The Company does not have a current on-market buy-back. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 537,634 2,173,407 352,942 31,250 121,331 1 20 1 1 3 65 This page has been left intentionally blank 66 This page has been left intentionally blank McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 67 This page has been left intentionally blank 68 McMillan Shakespeare Limited - Australia’s leading provider of workplace benefits. All of the benefits, none of the hassles. Annual Report 2012 McMillan Shakespeare Limited A.B.N. 74 107 233 983 A.F.S.L. No. 299054 Level 21, 360 Elizabeth Street Melbourne, Victoria 3000 www.mcms.com.au MCMS_MAKG_Rebrand_AnnReport2012.indd 1-2 16/08/12 3:32 PM